Top law expert drills down into new rules on dirty money flow to UK

The UK is finally delivering on its promise of a transparency register of overseas corporate ownership of real estate, says Edward Craft, corporate partner at Wedlake Bell LLP and chair of the Company Law Committee of The Law Society of England and Wales.

After a dramatic and high-paced progression through the Houses, the Economic Crime (Transparency and Enforcement) Act 2022 (ECA) was passed into law in the early hours of 15 March 2022, with Her Majesty apparently staying up late to give her assent.

The new law, introduced to Parliament at the beginning of March 2022, was based on a draft bill from 2018 and a policy announced by David Cameron in 2016.

The government is sensitive to questions as to why it did not act sooner. One might conclude that it was not viewed as a priority, recalling the resignation from the Government of Lord Agnew on 15 February 2022 stating that he was no longer able to defend the record of the Government on anti-fraud and anti-corruption measures.

The unconscionable Russian invasion of Ukraine changed everything and Parliament has rallied to deliver what should have been done a number of years ago.  

While it is a major leap forward that the ECA is now on the statute book, the speed at which it has been rushed through means that it will have imperfections.

The ECA has three core elements:

  • creating a new register of overseas entities holding UK real estate, together with enhanced disclosure of trust arrangements in respect thereof (the 'ROE Regime').
  • enhancements to the system of unexplained wealth orders.
  • enhancements to sanctions legislation.

A second Economic Crime Bill is expected later this year which will, amongst other things, bring forward a series of enhancements to the manner in which Companies House will operate.

The position of the UK in the flow of unwelcome of dirty money has been the subject of significant scrutiny, particularly from investigative journalists.  The UK has a rigorous and deeply-rooted anti-money laundering regime discharged by skilled professionals, but as one of the crossroads of the world  it is at the very same time a destination and point of transit for numerous complexions of capital. 

We expect implementation of the ROE Regime to be swift. For this to succeed, regulators, registries and practitioners alike will need to develop procedures at the very same time the register is being created.
ROE Regime built upon the foundations of the PSC Regime

Much of the detail of the register of overseas entities is built upon the rules and procedures of the people with significant control regime (Part 21A Companies Act 2006) (the "PSC Regime"), which came into force on 6 April 2016. The PSC Regime still has some imperfections and would benefit from refinement, but it is welcome to see the two systems deploy a similar approach and use much of the same precise language.

Immediate Impact

The ROE Regime is expected to be in force within a few months and will therefore start to impact on transactions currently in process. It is often impossible to predict when a transaction will close, after which title registration applications can be made. As a result, buyers, sellers and their advisory teams will need to operate as if the regime is already in force.

An overseas entity which holds UK real estate will need to register under the new arrangements, update the information on the register and be subject to a caution on the Land Registry.  The core provision is the new Schedule 4A to the Land Registration Act 2002.

Requirements Under the ROE Regime

Under the ROE Regime the overseas entity will be required to identify its "PSC equivalents" and register the details with Companies House.   Where the overseas entity holds real estate on trust, the beneficiary would also need to be disclosed. Information supplied to the register must be verified, although in the longer term the new verification procedures will require further changes to primary legislation and Companies House procedure.

Once registered, an overseas entity ID number will be provided and the entity must update its information annually, until such time as it successfully applies to be removed from the live ROE.

To register title to land, an overseas entity must be registered and must comply with the duty to update information.

Worked Example

Set out below is a simple example of how the ROE will impact directly on a transaction.

Facts
UK Property (P) is owned by company (Seller), incorporated in the BVI.  Seller owns no other UK property.
Seller holds P on trust for a single beneficial owner.
Seller is to sell P to another company (Buyer), incorporated in Jersey.

Analysis
The Seller won't be able to sell P without having registered under the ROE.  
The Buyer won't be able to buy P without having registered under the ROE.
The caution on the relevant land registry will need to be addressed.
Upon completion of the sale and resultant title transfers, Seller would deregister.

The key message for all who are involved in an entity registrable under the ROE is to prepare a complete data file containing all of the items of date required under ECA schedule 1 and schedule 2 as soon as possible.

By Edward Craft, corporate partner at Wedlake Bell LLP and chair of the Company Law Committee of The Law Society of England and Wales.

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