Understanding the UK’s new Economic Crime Act
The Economic Crime (Transparency and Enforcement) Act (the Act) was introduced to Parliament on 1 March 2022 and received Royal Assent on 15 March.
Fast-tracked as part of the Government’s response to the Ukraine conflict, the Act will have a significant and long-term impact on the enforcement of financial crime and sanctions in the United Kingdom.
This alert summarises the three key policy developments in the Act of which clients should be aware:
- establishing a public register of the beneficial owners of overseas entities that own property or land in the UK;
- strengthening the Unexplained Wealth Order regime; and
- amending the process for designating individuals and entities as the target of sanctions and strengthening the enforcement of sanctions-related offences.
Register of Overseas Entities
Part 1 of the Act establishes a publicly accessible Register of Overseas Entities that own UK land and property to be administered by Companies House. The Government first indicated its intention to introduce such a register in 2017 and draft legislation was published in 2018.
This new regime requires a company (or other legal entity, including trusts) governed by the laws of a country other than the UK to make an application for registration if it owns land (including property) in the UK.
The Register will have retrospective effect. In addition to future purchases, any overseas entity currently holding UK land that it purchased after 1 January 1999 (in England and Wales) or 8 December 2014 (in Scotland) will need to register. There will be a transitional period of six months following the legislation coming into force for such registrations to be made.
In an application for registration, the overseas entity will be required to identify any ‘Registrable Beneficial Owners’, defined as anyone who, directly or indirectly,:
- holds 25% or more of the shares in the entity;
- holds 25% or more of the voting rights in the entity;
- has the right to appoint or remove the majority of the entity’s board of directors;
- has the right to exercise, or actually exercises, significant influence or control over the entity; or
- has the right to exercise, or actually exercises, significant influence or control over a trust or other entity that meets any of the above conditions.
Following registration, the overseas entity will be required to update the register annually by declaring any change to its registrable beneficial owners. Failure to comply with the obligation to register and make annual declarations will carry significant criminal penalties for both the relevant entity and its officers, including custodial sentences of up to five years.
The Land Registry will not register a relevant overseas entity as the owner of UK land unless and until they have registered the beneficial ownership at Companies House. Additionally, the Act imposes restrictions on the disposal of UK land by overseas entities unless that entity is properly registered or otherwise exempt.
Reform to Unexplained Wealth Orders
Part 2 of the Act makes significant changes to the Unexplained Wealth Orders (UWOs) regime. UWOs were introduced by the Criminal Finances Act 2017, as a supplement to the procedures regarding Civil Recovery Orders (CROs) introduced by the Proceeds of Crime Act 2002, which enable the recovery of the proceeds of crime.
A UWO may be granted where:
- there are reasonable grounds for suspecting that an individual, or someone they are connected with, is, or has been, involved in serious crime (anywhere in the world); and
- that individual’s known sources of income would not enable them to obtain property which they currently hold.
An individual subject to a UWO is required by a court order to provide an explanation and evidence of how they obtained the funds used to purchase the property. Failure to comply with the order allows law enforcement agencies to apply for a CRO with a presumption that the property should be recovered. No criminal conviction is required for a CRO to be effected.
Part 2 of the Act introduces reforms that widen the scope of UWOs. Where the holder of property is not an individual, the Act’s reforms enable an application to specify a director, manager, secretary or partner to act as the ‘responsible officer’ for the entity, and have the UWO served on them. This prevents complex corporate structures acting as a barrier to the granting and implementation of UWOs.
Coupled with the Register of Overseas Entities, the widening of the scope of UWOs will provide law enforcement agencies with the ability to see who exactly holds beneficial ownership of UK property and to demand that any such person (if suspected of having connections to criminal activity) explain how they obtained the funds to purchase such property.
The Act also extends the determination period in relation to UWOs, during which the court assesses evidence/explanations provided in compliance with the order and determines what further action is required.
Sanctions Designations and Enforcement
The UK Government fast tracked this legislation to enable it to designate individuals and entities close to the Kremlin more quickly. The Act also lowers the test for imposing monetary penalties and makes wider changes to toughen up enforcement of UK sanctions.
Changes to Sanctions Designations
The Act simplifies the procedures under the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) by which Ministers designate entities and individuals for the purposes of UK sanctions. It also introduces an urgent procedure which makes designating persons significantly quicker and easier. Under this procedure, the Minister can designate a person entity where they are already designated by either the United States, European Union, Australia or Canada and the Minister considers that making the designation is in the public interest.
Designations made under the urgent procedure last for 56 days subject to an extension for a further 56 days. At that point, the Minister must certify that the standard procedure threshold for a designation has been met or the listing will lapse.
Immediately following Royal Assent, the Government has announced the designation of over 370 individuals, mostly using the urgent procedure.
Changes to the enforcement of UK sanctions
Prior to the introduction of the Act, the Office for Financial Sanctions Implementation (OFSI) would only impose penalties for violations of financial sanctions where OFSI could prove that the relevant person "knew, or had reasonable cause to suspect" that they were in breach of such sanctions. The Act amends the Policing and Crime Act to remove this requirement, making violating sanctions a strict liability offence.
Wider changes include a new power for OFSI to publicise details of breaches, even where penalties are not imposed. The Act also enables a greater sharing of information between OFSI and other law enforcement agencies.
The Government is expected to introduce further reforms in a second piece of economic crime legislation later this year. On 28th February, the Department for Business, Energy & Industrial Strategy published a White Paper which sets out proposals to transform Companies House from a ‘passive recipient’ of information to an ‘active gatekeeper’, playing a more important role in tackling economic crime and promoting corporate transparency.
Included in the reforms is the expansion of Companies House’s statutory role to include a new function of maintaining the integrity of the register of companies . In order to assist in carrying out this function, changes in upcoming legislation will include:
- Where an appointment or filing is deemed suspicious, further evidence can be requested. Suspicious activity may be picked up by algorithms (tracking the patterns associated with misuse) or raised to attention by a user ‘Report it Now’ function. Where the further evidence submitted is deemed insufficient, the filing/appointment may be rejected.
- Companies House will share more data with law enforcement, government bodies and the private sector in order to facilitate quicker identification of discrepancies between information on the register and that held by other bodies.
- Those involved in setting up, managing and controlling companies will be required to verify their identity. This includes directors, persons with significant control and anyone submitting filings on behalf of the company. As a result, all such individuals will have personal verified Companies House accounts.
For further information on how the Act will affect real estate, please see this related article.