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The framework of the new act holds potentially damaging significance to UK lenders who have relationships with overseas entities, writes Liz Sweeney of law firm Shoosmiths.
In March of this year, the Economic Crime (Transparency and Enforcement) Act received Royal Assent. The provisions of the act had been under discussion for some time, but the act was rushed through parliament in two weeks as part of the UK government’s response to the war in Ukraine. It introduced a new Register of Overseas Entities (ROE) intended to deter the use of UK property as an avenue for money laundering through investment by foreign entities.
The act’s purpose is to require greater transparency in relation to the ultimate beneficial ownership of UK property held in the name of overseas entities and so deter their use for money laundering purposes. It is also hoped that the increased visibility will assist authorities in imposing appropriately targeted sanctions. What are the main implications of its introduction and key considerations for lenders and their overseas borrowers?
A new public ROE
Money laundering is often hidden behind complex offshore corporate structures, making it harder to uncover illicit finance from abroad being laundered through the UK property market. Discovering who is the true owner of a property becomes more difficult if it’s registered in the name of an overseas entity, whose ultimate beneficial owners are hidden from view.
The act includes various provisions which together effectively require an overseas entity that owns or wishes to own property in the UK to apply for registration on the ROE maintained by Companies House and to provide certain details of its beneficial owner(s). Information supplied to Companies House is required to be verified by an accountant, solicitor or other professional and the information supplied will also need to be updated annually.
Overseas entities that fail to register will face tough restrictions on selling, letting and granting security over their UK property, and unless entered on the ROE, will not be able to apply for registration of their title to UK property at the Land Registry following any acquisition. In addition, overseas entities and their officers that fail to comply with the rules will face severe criminal sanctions.
Changes to the UWO regime
Unexplained Wealth Orders (UWOs) are a potentially valuable tool in the fight against corruption and other economic crimes. The act amends the grounds on which the court may grant an application for an UWO. In addition to the income test, examining whether the known sources of the person’s wealth are insufficient to have obtained the property, the court now has the ability to grant an application where it has grounds to suspect that a property has been obtained through unlawful conduct. The court is further granted the power to extend the duration of an interim freezing order while it determines the application.
Looking ahead
Under the act, all overseas entities that already owned UK property on August 1, 2022 and were registered as the proprietor after January 1, 1999 are required to be entered on the ROE (or to have applied for registration) before the end of January 2023. It is estimated that there are a total of 38,000 such entities. However, as of October 19, 2022 only 1897 overseas entities had completed registration. Given these numbers and the short timeframe remaining, it is anticipated that there will be delays in Companies House completing the registration process.
Banks and lenders need to be proactive in encouraging borrowers that own overseas entities to apply for registration
Banks and lenders need to be proactive in encouraging borrowers that own overseas entities to apply for registration on the ROE where needed – as well as to update the register in time. Often time consuming and complex to prepare, and with anecdotal evidence suggesting that many are rejected, applications need to be submitted sooner rather than later – particularly if they are to avoid the backlog expected from the end of this year.
Although lenders themselves have no legal requirement to ensure overseas borrowers comply, there is both a practical and a reputational risk to those whose overseas borrowers delay pulling together their applications. From a practical perspective, lenders will not want to be in a position where their overseas borrowers are unable to manage their properties effectively because they are subject to the restrictions imposed by the act. Lenders may also encounter some uncertainty enforcing security if an overseas borrower is not registered correctly.
From a reputational perspective, it is vital that correct due diligence around the new act is followed to prevent brand damage limitation. Given the perception that overseas entities are frequently used as a vehicle for money laundering, lenders will not want to be seen to condone financing those overseas entities that have failed to comply.
Lenders should also be alive to the fact that more legislation is coming down the line. The UK government has now published a further Economic Crime and Corporate Transparency Bill. This time the legislation will introduce measures intended to promote transparency in relation to, and prevent the abuse of, UK corporate structures. With the clock ticking to complete registration, and new regulations looming, time is of the essence for lenders.
Liz Sweeney is a banking and finance partner in the Manchester office of law firm Shoosmiths.
