The Economic Crime (Transparency and Enforcement) Act (the “Act”) is now in force.
The Act provides for the establishment of a Companies House Register for overseas entities that own property in the UK, strengthens the existing Unexplained Wealth Order scheme and introduces changes to the current sanctions regime. This note focuses only on the new regime for overseas entities.
The Act is part of the Government’s efforts to combat money-laundering and corruption in the real estate sector. The intention is to bring the reporting requirements of property-owning overseas entities into line with those that apply to the beneficial ownership of UK corporate entities. As such, the reporting requirements will be broadly comparable to the “People with Significant Control” regime for UK companies.
Overseas companies that already own UK property have until 31 January 2023 to comply with the registration requirements. Given that the registration process may not be straightforward and that Companies House may well be subject to backlogs, clients would be well-advised not to leave the task until close to this deadline.
The registration requirement applies to any overseas entity that has acquired property in England and Wales since 1 January 1999. The equivalent dates in other parts of the UK are 8 December 2014 in Scotland and 1 August 2022 in Northern Ireland.
Given the retrospective effect of the Act, overseas entities owning UK property and lenders to overseas entities may wish to review their UK property and loan portfolios for compliance purposes.
Effect of the Act
Register of Overseas Entities
Any overseas entity which owns or plans to own a “qualifying estate” in UK property must apply to become a “registered overseas entity” on the new register at Companies House. A “qualifying estate” in England is a freehold or a lease of more than seven years.
To become a registered overseas entity, the company must submit details of its beneficial owners to Companies House. This information must also be updated or confirmed annually.
A “beneficial owner” is a person owning 25% or more of the shares or voting rights in that entity, or a person who has the right to appoint or remove a majority of the board of directors, or who exercises or is entitled to exercise significant control over that entity.
Land Registry Changes
The Land Registry will place a restriction on every registered title owned by an overseas entity. The restriction will prohibit any “relevant disposition” unless the overseas entity is a registered overseas entity at the time of the disposition and it has complied with the annual updating obligation. A “relevant disposition” means a transfer, granting a lease of more than 7 years or the granting of a legal charge.
The restriction will not affect title to the property but will impact on the owner’s ability to dispose of the property or to grant security over it. However there are certain exceptions to this restriction. The most relevant exception for a lender with a registered legal mortgage over the property is the exception that allows dispositions made by a registered charge-holder or a receiver exercising a power of sale.
Failure to comply with the regulations can lead to criminal and financial penalties for overseas entities and their officers.
The identity and supporting documents evidencing the beneficial ownership of the overseas entity will need to be verified by a UK-regulated agent. As part of the registration process, that agent will need to supply its assurance code in order for the registration to be completed.
The verification process will include the agent requiring:
- evidence of the existence and standing of the overseas entity and any parent company (which can be obtained from any relevant public register or, in the absence of a public register, from a local lawyer or corporate services provider)
- information on individual beneficial owners, including passport copies, utility bills or bank statements and evidence of their ownership of the relevant entity, including the date on which they became an owner (as such information is evidenced by the relevant register or confirmed by a local law professional).
Unlike the Anti-Money Laundering Guidelines applicable to UK solicitors, there is no flexibility for verification agents to take a risk-based approach so we should expect them to take a stricter approach in respect of the certification of documents and checking the photographic likeness of an individual’s passport by meeting in person or by video.
In light of Law Society guidance, Brecher LLP will not be acting as a verification agent for these purposes. Clients who are affected by the Act should speak to their accountants and/or corporate administrators who may be able to provide verification services.
A failure to comply with the Act may potentially be a criminal offence. Breaches may attract fines of up to £2,500 per day and prison sentences of up to five years. Accrued fines may be chargeable against the relevant property, potentially resulting in the property being seized in order to recover the debt.
As noted above, non-compliance may also lead to restrictions being placed on the title of the relevant property, preventing its disposal.
If your business involves lending to overseas corporate entities that own UK property, you will need to ensure that any overseas borrower is registered and fully compliant with the Act in order to be certain that your security can be enforced. We would suggest notifying your borrowers/security providers who are incorporated overseas to make them aware of the registration and timing requirements.
On new loans, you will need to consider the timing requirements of achieving first time registrations as you will no doubt want to confirm registration before lending by adding a condition precedent to the making of the loan that registration on the Register of Overseas Entities has occurred, together with a search of the Register of Overseas Entities as part of your initial due diligence process.
You may wish to consider adding specific undertakings from overseas entities in the relevant finance documents to cover initial and ongoing compliance with the registration requirements during the term of the loan, however it is thought likely that “compliance with laws” undertakings will cover this point.
If you have any concerns about if the Act applies to your business and, if so, how to proceed with the registration obligations, please contact your regular point of contact at Brecher LLP and we will be pleased to assist.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.