The Bill introduces the "Register of Overseas Entities" which the government says will "crack down on foreign criminals using UK property to launder money" by increasing transparency of real estate ownership. However, the reach is much further than this and the real estate industry will want to be sure that this scheme is appropriately resourced and mandated to deal with applications promptly. The industry will not want the price of transparency to unduly hinder transactions.
How will the Register work?
The scheme will require overseas entities to register information about the entity at Companies House along with information about its beneficial owners. The beneficial owner is the person who ultimately controls or owns that asset. This person may be a different entity from the legal owner and therefore not revealed by a search of the Land Registry's register of land ownership.
Companies House will verify the information and then issue a unique identification number (an overseas entity ID). Without the ID, the overseas entity will not be registered at the Land Registry as the owner of property. The overseas entity will need to comply with an “updating duty” (at least every 12 months from the date of registration) in order to retain its status as a “registered overseas entity”. If entities do not comply with these requirements, the Land Registry will place restrictions on the title registers to prevent sales, charges and leases of more than seven years from being registered.
Overseas entities who already own UK property will be given 18 months from implementation of the new law to register and obtain an ID. After that a restriction will be put on their property registers whether or not they have complied. However, it is only those with an overseas entity ID who will be able to comply with the restriction and subsequently sell, charge or let.
The flowchart below (published as part of the government’s earlier impact assessment) sets out how the proposed system will work:
Who will it affect?
All overseas entities must register with Companies House and provide details of identified registrable beneficial owners along with the required information about those beneficial owners. If there are no beneficial owners the entity must state this and instead provide information about its managing officers. In limited circumstances the government may exempt an entity. If the overseas entity believes there is at least one registrable beneficial owner that it has been unable to identify it has to say so and instead it must provide information about each managing officer of the entity and what information it can about the beneficial owners.
At the same time as the Bill, the government released a White Paper detailing how they will upgrade Companies House to enable them to enforce this regime. Companies House already provides free, basic company information for the public to search but has exercised a limited regulatory function. The government has stated that the proposed reforms will make it harder to make anonymous filings as anyone setting up, managing or controlling companies will have to have a verified identity with Companies House or an anti-money laundering third party agent.
An overseas entity is a legal entity that is governed by the law of a country outside of the UK and can be a corporate, partnership or other person that is a legal person under its governing law.
The definition of “beneficial owner” and the information that is required will be broadly the same as under the PSC ("persons with significant control") regime which requires UK corporates to maintain a register of individuals with “significant control”. This avoids any mismatch between the different registers and compliance requirements.
The regime is such that it would include commonly used Jersey, Guernsey and Luxembourg structures.
Timing
According to the Bill, the new Register will apply retrospectively to property bought by overseas owners from January 1999 in England and Wales and since December 2014 in Scotland.
When will this come into effect?
The government expects that the Register will have “an immediate dissuasive effect” on those who were intending to buy UK property with illicit funds. It has stated that implementation will proceed "at pace" following Royal Assent of the Bill. The reality is that Companies House has to deliver the new Register and co-ordinate with the Land Registry which may take some time in practice.
Consequences of non-compliance and retrospective effect of the Bill
Overseas entities who acquire property and who do not declare their beneficial owners will not obtain the Overseas Entity ID, so will not be registered at the Land Registry as the owner of property and are liable to imprisonment. Transferring a property to an overseas entity that does not yet have a valid overseas entity ID will not void the transfer. Instead, an overseas buyer will not be able to register its transfer at the Land Registry without the ID from Companies House. This means that it will not become the legal owner until this registration is completed.
Where a registered overseas entity fails to comply with the ongoing “updating duty”, the Bill makes it clear that an offence is committed by the entity, and also every officer of the entity who is in default, making them liable to a daily default fine of up to £500. Providing false or misleading information is also an offence under the Bill which could lead to a fine or imprisonment.
And it doesn't end there. Existing overseas owners must register as an overseas entity within 18 months from the commencement of the Act. Again, if this is not done, the overseas entity and every officer who is in default risks a fine or imprisonment. It is striking that this is even the case where the entity became the registered proprietor of the relevant property pursuant to a Land Registry application made on or after 1 January 1999 but before the commencement date of the Act. This retrospective application is unusual in an Act, particularly stretching so far but is a clear indication of how seriously the government consider ownership transparency.
Next steps
The Bill also expands the use of Unexplained Wealth Orders which have been little used to date.
The government has confirmed that it will release a further Economic Crime Bill “in the coming months”. This will also include:
• new powers to seize crypto assets and bring them within the scope of civil forfeiture powers to tackle the growing threat from ransomware and the use of crypto assets for money laundering;
• strengthened anti-money laundering powers to give businesses more confidence to share information on suspected money laundering and other economic crime; and
• reforms to bear down on the use of limited partnerships as vehicles for “facilitating international money laundering (including illicit Russian finance) and illegal arms movements".
The government is also considering going further and seizing UK property from sanctioned individuals. Whether this will be limited to residential homes remains to be seen. Commercial property would be far more challenging both legally and practically. Either way it would require legislation to change the legal framework but it is clear that the government wishes to send a clear signal that the UK property market is not a safe haven for “dirty money”.
Authored by Jane Dockeray and Ingrid Stables.
