The tragic events in Ukraine have caused Western governments to take various steps to cause economic damage to the Russian state, Russian companies and Russian nationals. In coordination with other governments, the UK Government has imposed escalating sanctions, which we are tracking here.
As part of this approach the UK Government has also brought forward the publication of the Economic Crime (Transparency and Enforcement) Bill (the "Bill") – indeed Prime Minister Boris Johnson said that "There is no place for dirty money in the UK. We are going faster and harder to tear back the façade that those supporting Putin's campaign of destruction have been hiding behind for so long. Those backing Putin have been put on notice: there will be nowhere to hide your ill-gotten gains."
Whilst the Bill is introduced in the context of Russia's attack on Ukraine, its impact will not be limited to Russian entities or persons but will affect all non-UK entities operating in the UK. It still needs to be debated in Parliament, and so may yet change – but importantly it proposes a new public register of overseas entities to identify the beneficial owners of overseas entities including those that hold land in the UK; and it makes changes to the Unexplained Wealth Order ("UWO") regime. This update summarises the key elements of those changes as set out in the Bill.
The proposed register of overseas entities
The Bill proposes a new, publicly available, "register of overseas entities" to be maintained by Companies House. This builds on the introduction in 2016 of the register of "persons with significant control" of a UK company.1 Each overseas entity is to provide specific information, including about its registrable beneficial owner(s) and "managing officers" (which includes a director, manager or secretary). There is a general offence that if someone submits information which is false or misleading then they will be potentially liable to a two-year prison term, or a fine, or both.
The information must be updated annually, failing which the entity and its officers will each be liable for a fine and, for continued contravention, a daily default fine not exceeding £500.
In order to own property in the UK, an overseas entity would have to be entered on the register of overseas entities. This would also apply retrospectively – so where an overseas entity has purchased property in England and Wales on or after 1 January 1999, that entity would have to be on the register of overseas entities. If not, the entity would face restrictions in the onward sale of the property. There is, though, a proposed transition period of 18 months (from the date the Bill becomes law) for such historic transactions to be recorded and any restrictions to take effect.
If the owner of the property is an overseas entity which is not on the register, the Government can serve a notice on that entity requiring it to register within 6 months. If the entity fails to comply with the notice then the overseas entity will be liable to a fine, and every officer of that entity will be liable to a two-year prison term, or a fine, or both.
As for the definition of "beneficial owners" of the overseas entities, the Bill adopts the same criteria as are set out in Schedule 1 of the Companies Act 2006 to define a "person with significant control" over a UK company. That is, for the purposes of the Bill, the "beneficial owner" of an overseas entity is a person or entity which for which one or more of the following conditions apply:
- They hold, directly or indirectly, more than 25% in the overseas entity;
- They hold, directly or indirectly, more than 25% of the voting rights in the overseas entity;
- They hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity;
- They have the right to exercise, or actually exercise, significant influence or control over the overseas entity;
- They are trustees of a trust, members of a partnership, unincorporated association or other entity which is not a legal person under the law by which it is governed; and they have the right to exercise, or actually exercise, significant influence or control over the activities of that trust or entity.
As noted above, this new register and other the requirements are not limited to overseas entities from any one jurisdiction, but apply to all non-UK entities – notwithstanding the context in which the Bill has been brought forward.
However any new law is only as effective as the enforcement of that law. The Bill, if passed in its current form, would place further administrative burdens on both Companies House and the Land Registry. Whilst the UK Government has also recently published a white paper2 on proposed reforms to Companies House, including to strengthen its ability to verify information provided to it, the Government will still be required to fund the enforcement of any new powers, including to enforce the register of overseas entities and the enforcement of the sanctions proposed in the Bill.
The proposed changes to the UWO regime
The Bill also amends the UWO regime, which was established by the Criminal Finances Act 2017, so that a court cannot award costs against the government agency seeking a UWO except in very narrow circumstances.
When UWOs were first introduced, they were hailed as a potential game-changer in seeking to root out "dirty money". A UWO is a civil law (as opposed to criminal law) tool issued by the High Court upon the application of a UK enforcement authority, and essentially reverses the burden of proof so the recipient of a UWO must explain how the respondent obtained the property detailed in the UWO. They can only be issued where the High Court is satisfied that:
- the recipient is a "Politically Exposed Person" or there are reasonable grounds for suspecting the recipient of serious crime in the UK or elsewhere, or someone connected to the recipient has been so involved;
- the property in question is more than £50,000 in value; and
- there are reasonable grounds for suspecting that the known sources of the respondent's lawfully obtained income would have been insufficient for the recipient to obtain the property.
However UWOs have only been used sparingly, with varying degrees of success. The risk for a UK enforcement agency in applying for a UWO and being successfully challenged is that – applying the normal civil rules on costs in litigation in England – the agency would have to pay the legal fees of the recipient of the UWO who successfully challenged the UWO, as well as its own. That risk crystallised in one unsuccessful UWO application, when the requesting enforcement authority, the National Crime Agency, was ordered to pay c. £1.5 million to the intended recipient when they successfully challenged the UWO. The concern is that this creates a "chilling effect" on enforcement authorities, not taking advantage of this tool given the risk of significant costs orders against them if they are unsuccessful.
In order to eliminate this risk, the Bill proposes that the court cannot award costs against an enforcement authority that unsuccessfully applies for a UWO except in the – extremely limited – circumstances where the enforcement authority acted unreasonably in making the UWO application, or where it acted dishonestly or improperly in the course of the proceedings.
1The requirement in the UK to identify the "person with significant control" of a UK company was introduced by the Small Business, Enterprise and Employment Act 2015, which amended the Companies Act 2006.