Real estate implications for overseas entities of Economic Crime (Transparency and Enforcement) Bill

Summary

The draft Economic Crime (Transparency and Enforcement) Bill has been published to set up the Companies House register for beneficial owners of overseas entities that own UK property. The Bill forms part of the UK Government’s strategy to combat economic crime and to crack down on overseas criminals using UK property to launder money. Once the register has gone live, there will be implications for overseas entities that are, or are entitled to be, the proprietor of land registered at the Land Registries for England/Wales, Scotland or Northern Ireland, or for parties dealing with them. Failure to comply with associated duties under the new legislation will seriously impact on the overseas entity’s ability to sell, let or charge its land and it is a criminal offence for the entity and its officers at fault with fines and/or imprisonment. Overseas entities should consider their UK land ownerships or proposed acquisitions to understand the implications of the legislation for their organisations.

The Bill will also strengthen the regime for Unexplained Wealth Orders to be made. These enable law enforcement to investigate the origin of property and facilitate the recovery of proceeds of crime.

Policy drivers

For a number of years the UK Government has been working up proposals for a register of beneficial owners of overseas entities that own UK property and in 2018 a draft Bill to give effect to the proposals was published. In recent years little has been said about the progression of the legislation, but with Russia’s invasion of Ukraine the Government has announced that it is bringing forward the proposals in a slightly revised form in the Economic Crime (Transparency and Enforcement) Bill (“Bill”), which was introduced in Parliament on 1 March 2022.

A key policy driver behind the Government’s proposals is to improve the transparency around who ultimately owns land in the United Kingdom where the land is registered to an overseas entity. Where an overseas entity has been used as a vehicle in criminal activity, the current inability, frequently encountered, to access information about the individuals/entities who ultimately own or control the entity hampers law enforcement investigations.

This can be contrasted with the position for UK-registered entities, which since June 2016 have been required to identify each person with significant control over the entity and to record their details in a dedicated register (the PSC register) and, since June 2017, to notify Companies House whenever a PSC or their details change. Broadly speaking, a PSC is an individual who holds over 25% of the voting rights or shares in the entity, or has the right to appoint or remove the majority of the board of directors, or exerts a similar level of influence or control through other means. Here is a link to the CMS client publication on the PSC Register.

The Bill provides for the creation of a new register of overseas entities at Companies House. Its primary objective, through the greater transparency created by the register, is to prevent the use of UK land by overseas entities to launder money or invest illicit funds. This register will for the most part be available to the public and as well as applying prospectively, will also apply retrospectively to property bought by overseas owners up to over 20 years ago in England and Wales and since December 2014 in Scotland.

An “overseas entity” is a body corporate, partnership or other entity that is a legal person governed by the law of a country or territory outside the United Kingdom. The legislation does not, therefore, affect overseas individuals owning UK property directly or through a UK entity.

No specific timeframe has been cited for when the register is intended to be operational. However, the Government’s expectation is that the register will have an immediate dissuasive effect on those who were intending to buy UK property with illicit funds. They say that implementation will proceed at pace following Royal Assent of the Bill.

Registration at Companies House

An overseas entity that owns or is entitled to own UK registered land will be required to register itself on the new Companies House register, unless an exemption applies. As part of the application to register, details must be provided of the beneficial owners (or, unusually if none/incomplete information, managing officers) of the entity (the criteria for who is a beneficial owner are modelled on the PSC regime). Following registration, this “registered overseas entity” is given an overseas entity ID and has a duty annually to confirm the information on the register remains up to date, or to deliver updated information. Failure to do so is an offence.

Conveyancing implications for England and Wales

This Law-Now focuses on the Bill’s conveyancing implications for England and Wales.

The method by which the Government will enforce Companies House registration is through introducing controls over the ability of overseas entities or certain parties transacting with them to register themselves at HM Land Registry. The transfer (or other disposition) of land by the overseas entity remains valid, but the disposition may not be registered at the Land Registry if there has been no Companies House registration. There are several possible scenarios.

(i) Overseas entity seeking registration

To be registered at the Land Registry as the owner of a freehold estate or a leasehold estate granted for more than 7 years (known as a “qualifying estate”), the overseas entity must be either:

• a “registered overseas entity” (having complied with the registration and updating duties at Companies House); or
• an “exempt overseas entity” (which will be defined by regulation although Government previously had in mind foreign governments and public authorities).

If it is neither, it cannot apply to be registered at the Land Registry and will not obtain legal title. This catches voluntary or compulsory registration of a qualifying estate that is unregistered, or registration of a disposition involving a qualifying estate that is already registered. It will not catch ownership of unregistered land where the owner chooses not to register or is not compelled to do so.

(ii) Restriction on disposal

If an overseas entity is a registered proprietor of a qualifying estate and became registered pursuant to an application made on or after 1 January 1999 and whether or not it is an exempt overseas entity, the Land Registry must enter a restriction on the title to that estate. The restriction prohibits the registration of a disposition being any transfer, the grant of a lease for more than 7 years or the grant of a legal charge. There are certain exceptions:

• the entity is a “registered overseas entity” or an “exempt overseas entity” at the time of the disposition – this does not allow for the registration of the entity at Companies House after completion of the disposition but before registration at the Land Registry
• the disposition was made pursuant to a contract dated before the restriction was entered in the register
• the disposition was made in the exercise of a power of sale or leasing conferred on the owner of a registered charge or a receiver appointed by such an owner. This exception provides comfort to lenders to overseas entities (whose charges are registered at the Land Registry) that key powers are not caught by the restriction
• pursuant to statutory obligation or court order (the Government cites as an example a tenant’s statutory rights to a lease renewal granted out of the overseas entity’s estate), or the disposition occurs by operation of law
• the Secretary of State gives consent to the registration (consent may be given if the Secretary is satisfied that at the time of the disposition the disponee did not know and could not reasonably have been expected to know of the prohibition under the restriction, and it would be unjust for the disposition not to be registered) or
• the disposition is made by a specified insolvency practitioner in specified circumstances.

If the entity became registered pursuant to an application made before the new legislation commences, the Land Registry must enter the restriction within 12 months of commencement. However, the restriction (although it will appear on the register) will make clear that it does not take effect until the end of 18 months after commencement. See also the Transitional provisions at (v) below.

(iii) Where overseas entity disposing entitled to be, but is not registered

If the entity became entitled to be registered as proprietor of a qualifying estate after this legislation came into force but is not registered, a transfer, grant of a lease for more than 7 years or grant of a legal charge by the entity cannot be registered unless an exception applies broadly similar to those mentioned above. This covers the situation where there is no restriction to control the disposition by the entity, because it is disposing before it is registered. Since the party transacting with the entity will not be entitled to be registered at the Land Registry, they will not have owner’s powers to further dispose of the estate.

(iv) Criminal offence

The legislation prohibits an overseas entity making a “registrable disposition” if the registration of the disposition is prohibited by a restriction or in the situation at (iii), both mentioned above. While the disposition itself is valid (so that for example a transfer and the payment of the proceeds pursuant to the transfer remain valid), it cannot be registered at the Land Registry (with the consequences set out at (iii) above) and the entity and every officer of the entity “in default” commits an offence in making the disposition.

This is a criminal offence (and the most serious offence in the Bill) and is punishable by a fine and/or imprisonment of up to 5 years. An “officer” of the entity includes a person in accordance with whose directions the board of directors or equivalent management body is accustomed to act (but not a person giving advice in a professional capacity). Being “in default” means that the officer authorised, permitted, participated in or failed to take all reasonable steps to prevent the contravention. The prohibition affects registrable dispositions of a qualifying estate, so any other transaction is not caught. So the prohibition does not apply if the overseas entity enters into a transaction that does not have to be registered at the Land Registry such as the grant of a lease for 7 years or less.

(v) Transitional provisions

If an overseas entity became the registered proprietor pursuant to an application made on or after 1 January 1999 but before the new legislation commences, it has 18 months from commencement to become a “registered overseas entity” (having complied with the registration and updating duties at Companies House or there is a pending application for registration). If it does not do so (and does not dispose of the estate before the end of the 18 months) and is not an “exempt overseas entity”, the entity and every officer in default (as mentioned above) commits a criminal offence punishable by a fine and/or imprisonment of up to 2 years. If the entity became registered pursuant to an application made prior to 1 January 1999, this new duty does not apply to them.

Secretary of State’s power to require registration

If the overseas entity became the registered proprietor pursuant to an application made on or after 1 January 1999 but is neither a “registered overseas entity” (and there is no pending application for registration) nor an “exempt overseas entity”, the Secretary of State can by notice require them to apply for registration in the register of overseas entities at Companies House within 6 months from the date of the notice. Failure to comply is a criminal offence punishable by a fine and/or imprisonment of up to 2 years, unless the entity became an exempt overseas entity or ceased to be the registered proprietor during the 6 months.

Contractual protection

A party transacting with an overseas entity will need to ensure that it has contractual protections to enable it to be registered at the Land Registry.

Unexplained Wealth Orders

The Bill also proposes measures to strengthen the UK’s regime for Unexplained Wealth Orders, which enables law enforcement to investigate the origin of property (and facilitate the recovery of proceeds of crime), by amending the Proceeds of Crime Act 2002.

An unexplained wealth order (“UWO”) is an investigatory order placed on a person (a “respondent”) whose assets appear disproportionate to their income, to explain the origins of their wealth. The UWO requires a respondent person who is a Politically Exposed Person (PEP) or reasonably suspected of involvement in, or of being connected to a person involved in, serious crime (in the United Kingdom or elsewhere) to explain the origin of assets (minimum combined value of £50,000) that appear to be disproportionate to their known lawfully obtained income.

A UWO is not (by itself) a power to recover assets. However, any response from a UWO can be used in subsequent civil recovery proceedings. A failure to respond to a UWO will mean that the assets can be made subject to civil recovery action under the Proceeds of Crime Act 2002. A respondent can also be found guilty of an offence if they provide false or misleading information in response to a UWO.

The proposals would extend the ability to seek UWOs to the “responsible officers” of corporates entities and other ownership structures. “Responsible officers” will include any director of the respondent, any member of the respondent’s management body equivalent to a board of directors, any other manager, secretary or similar offices of the respondent, any partner of any respondent that is a partnership, and any person in accordance with whose directions or instructions the board of directors or equivalent body of the respondent are accustomed to act.

The proposals will also allow the courts to grant extensions to the period during which interim freezing orders can be made during a UWO procedure, and will restrict the basis on which the courts might make a costs order against an enforcement authority in respect of a UWO procedure.

Scottish Position

The position in Scotland under the Bill will be closely aligned to that in England. Overseas entity’s acquiring land or becoming tenant under a long lease (a lease for in excess of 20 years) will require to be a registered overseas entity or an exempt overseas entity to enable registration of the Disposition or Lease/Assignation in the Land Register of Scotland. As with England, disposals by an overseas entity will also be impacted with those whose interest was registered on or after 8 December 2014 requiring to be a registered overseas entity or an exempt overseas entity for a Disposition, Standard Security, Lease or Assignation by them to be accepted for registration in the Land Register. Scotland is already preparing for the introduction of its own transparency regime on 1 April 2022, the Register of Persons Holding Controlled Interests in Land (“RCI”), Register of Persons Holding a Controlled Interest in Land – one month to go! (cms-lawnow.com) which will be more far reaching, and already seeks to encompass transparency for overseas entities. It is anticipated that, once the new UK Register and rules come into force, registered overseas entities will join the list of entities out of scope of the RCI, as they have their own transparency regimes, to avoid double reporting.

Wider context

The Government has published a White Paper setting out its plans to upgrade Companies House, which include:

• requirements for anyone setting up, running, owning or controlling a company registered in the UK to verify their identity with Companies House
• expansion of the powers of Companies House including the power to challenge and/or reject information that appears dubious and to share such information with security agencies
• restrictions on the ability of overseas company agents to create companies in the UK.

This and further reform of Companies House in the forthcoming Economic Crime Bill are intended to clamp down on illicit finance and improve corporate transparency.