The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) received royal assent on 15 March 2022, its introduction having been expedited through Parliament following Russia’s invasion of Ukraine.
It seeks to strengthen the UK’s fight against economic crime by introducing the following new measures:
- a beneficial ownership register for foreign entities holding UK property;
- strengthening of the unexplained wealth orders regime (UWOs); and
- strengthening of enforcement of sanction related offences
The changes in this act aim to provide the UK Government and law enforcement agencies with additional and easier to use tools to deter and prevent economic crimes.
Beneficial Ownership Register
Part 1 of the Act, which is not yet in force, sets up the register of overseas entities. This part is designed to compel overseas entities to register if they own land in the UK[1]. It applies to all legal persons that are governed by a country or territory outside of the UK and requires the entity to register with Companies House.
There has been widespread concern about the lack of transparency around who ultimately owns land in the UK, with law enforcement investigations often being hampered by an inability to access information about the individuals who ultimately own or control overseas entities. The introduction of the register is designed to make it easier to prevent opaque and complex offshore corporate structures being used to hold UK property and therefore to prevent the laundering of proceeds of bribery, corruption and organised crime[2]. In addition, it is intended to increase transparency and therefore public trust in overseas entities (and in Companies House).
The register will require overseas entities to, alongside registering its property ownership, identify its beneficial owner(s)[3], which generally includes individuals, legal entities, governments or public authorities who:
- hold over 25% of shares of voting rights,
- hold the right to appoint or remove directors, and/or
- have the right to exercise ‘significant influence or control’.
The information will be verified, publicly available[4] and there is a requirement for annual updates. The obligation to register takes place immediately upon commencement of the Act and applies to any properties owned by an overseas entity since 1 January 1999.[5] The Act does, however, allow for a 6 month transition period for the registration to take place.
A failure to register, or to comply with the updating duty, will affect the ability of the entity to acquire legal title[6], sell or lease the land, or create a charge over land, as any buyer, tenant or a mortgagee would be unable to register that disposition with the Land Registry in any part of the UK. In addition, failure to update the register or providing false or misleading statements to the registrar is a criminal offence[7] and financial penalties can be imposed[8].
The introduction of this register has been a long time coming, a commitment having been made for such a register at the 2016 Anti-Corruption Summit in London[9]. It builds on the current Persons with Significant Control (PSC) regime[10] whereby UK registered companies are obliged to keep a register of “people with significant control” over that company, and to disclose that information to the public register held at Companies House. This regime was designed to capture individuals who own a significant share in the company’s share capital, have a right to exercise control through voting rights and/or who control the company through other means.
Unexplained Wealth Orders
Part 2 of the Act which, along with Part 3, is in force, seeks to strengthen the use of Unexplained Wealth Orders (UWOs) in the battle against financial crime. Introduced in 2017[11], an UWO requires a person who is a politically exposed person (PEP) or reasonably suspected of involvement in, or connected to a person involved in, serious crime to explain the origin of their assets that appear disproportionate to their known lawfully obtained income. The response to the Order can then be used in civil recovery proceedings, giving law enforcement agencies the ability to confiscate assets without having to prove to the criminal standard that the property was obtained from criminal conduct[12].
To date this power had limited impact, the reasons being varied. Primarily, using UWOs to pursue the richest and most powerful targets carries financial risks, and the government has been criticised for not giving the National Crime agency (NCA) the necessary financial clout or legal powers to make UWOs more effective[13].
The Act makes changes to the UWO regime in three significant ways:
- by allowing a fuller investigation to take place by extending the maximum time a court can allow property to be frozen in relation to a UWO;
- by adding a further category of persons – ‘responsible officers’ – who may be specified in a UWO[14]; and
- limiting costs that can be claimed on failed UWO applications.
Extending the time for which property can be frozen will provide investigators an additional 126 days to review material provided in a response to a UWO,[15]altering the balance between the rights of individuals and the time needed for law enforcement authorities to investigate a case sufficiently.
The addition of the ‘responsible officers’ clause means that the existing powers that enable UWOs to seek information are widened to obtain information from persons who are officers of legal entities thought to have control over an asset, even if the officer is not the property holder themselves. Again, this is to prevent the ability to hide behind corporate ownership structures.
Importantly, provided the authority has not acted unreasonably, dishonestly or improperly, it will be protected from an order for costs upon the discharge or variation of an UWO or associated interim freezing order. This change is likely to have the most significant impact, removing a disincentive to the NCA reasonably investigating and obtaining UWOs.
Sanctions
Part 3 of the Act introduces some changes to UK sanctions. As has been seen throughout the recent Russian invasion of Ukraine, sanctions are considered to be an important foreign policy tool worldwide to influence or constrain behaviour or communicate a political message to other countries or persons.
One key change is the introduction of the strict liability test. This lowers the test giving rise to the power to impose monetary penalties for the breaches of sanctions. Currently, a person suspected of breaching financial sanctions must ‘kn[o]w or ha[ve] reasonable cause to suspect’ that they were in breach of the financial sanctions legislation[16]. The Act removes the requirement for knowledge or reasonable suspicion[17] and will mean that businesses may face liability for breaches of sanctions even where they have no knowledge or reasonable cause to suspect that a transaction is in breach of sanctions. There is still a requirement to prove the breach of the sanctions, however, before a penalty can be issued. The strict liability test will make it easier for financial penalties to be imposed. These are limited to £1m or 50% of the economic resources dealt with, whichever is the greater[18].
In addition, the Act provides the ability for the Office for Financial Sanctions Implementation to publicise notices detailing violations of sanctions even where it has decided not to enforce a penalty for the breach[19].
The Act also introduces a mechanism for the urgent designation of a person or entity for the purpose of imposing sanctions quickly, if other countries have already done so and it is in the public interest to do the same. This is a direct response to the invasion of Ukraine.
Future
It is clear that this is a welcome first step in strengthening UK economic crime measures. The Government has already introduced a White paper setting out plans for further reform of Companies House, to include giving further powers to the Registrar to challenge information provided to it, stronger identity verification procedures and restrictions on the ability of overseas agents to create companies in the UK. In addition, it is expected that measures may be introduced to address cryptocurrency-related fraud and money laundering, an ever-growing area of financial crime.
Fani Gamon
[1] S.33 & s.34
[2] Explanatory notes https://publications.parliament.uk/pa/bills/cbill/58-02/0262/en/210262env2.pdf
[3] S.12(2)
[4] Subject to some exceptions
[5] In England & Wales. In Scotland from 8 December 2014.
[6] By adding Schedule 4A, and in particular paragraph 2, to the Land Registration Act 2002
[7] S.32
[8] S.39
[9] https://publications.parliament.uk/pa/bills/cbill/58-02/0262/en/210262env2.pdf
[10] Small Business, Enterprise and Employment Act 2015
[11] Criminal Finances Act 2017
[12] https://commonslibrary.parliament.uk/research-briefings/cbp-9098/#:~:text=Unexplained%20Wealth%20Orders%20(UWOs)%20give,was%20obtained%20from%20criminal%20activity.
[13] https://www.lawsociety.org.uk/topics/anti-money-laundering/economic-crime-act
[14] S.362A(8)
[15] Up to a maximum of 186 days
[16] S.146(1)(b) Policing and Crime Act
[17] S.54(3)
[18] S.146 Policing and Crime Act
[19] S.56
