In the early hours of 15 March 2022, following a wait of almost five years, the UK Parliament introduced into law the Economic Crime (Transparency and Enforcement) Act (the "Act"). The Act was fast-tracked at an "unprecedented speed"1 in response to Russia’s invasion of Ukraine on 24 February 2022 and followed an expedited passage through Parliament to receive Royal Assent.
The Act targets overseas individuals seeking to launder money in the UK via UK assets and develops and strengthens the UK’s existing anti-money laundering and sanctions legislation in three key areas by:
i. Creating registration requirements for foreign owners of land in the UK;
ii. Enhancing the existing unexplained wealth order (“UWO”) regime; and
iii. Introducing an expedited process for imposing sanctions on persons already designated by allies such as the EU and U.S., and introducing strict liability for the purpose of issuing monetary penalties for sanctions breaches.
The Act’s introduction has been squarely framed by current events, with UK Home Secretary Priti Patel characterising it as a measure to "strengthen our response to Putin’s cronies and ensure that corrupt elites have nowhere to hide their dirty money in the UK."2 The Act should nevertheless be viewed in the context of wider reforms to the UK’s economic crime legislation, including the Law Commission’s planned amendments to corporate liability laws in February 2022, proposed reforms to Companies House and the introduction of greater powers to seize crypto assets.
Part 1 - Register of Overseas Entities
The bulk of the Act is dedicated to establishing a new Register of Overseas Entities ("ROE") which obliges foreign corporates who have purchased land since 1 January 1999 to investigate, identify, provide and update information about their beneficial owners within 6 months of the Act coming into force. The Act also makes changes to the land registration system in the UK so that overseas entities who have purchased qualifying land in the UK since 1 January 1999 will be prevented from making disposals unless they have properly registered with the ROE. It is backed by criminal and civil penalties (fines and, as applicable, imprisonment) for corporates and their directors and officers. Offences will be prosecuted by the Crown Prosecution Service whilst the Act also creates a separate power for the Registrar of Companies House to issue civil financial penalties where they are satisfied that an offence has been committed under Part 1.
We previously reported on the new ROE regime as the bill was passing through Parliament.3 Since then, the transitional period for registration with the ROE has been shortened and now requires overseas entities that are the registered proprietors of a qualifying estate to have registered with the ROE no later than six months after the date on which Part 1 comes into force (that date will be set by regulations).4 On applying to register with the ROE, overseas entities will also be required to declare any “registrable dispositions” of land made between 28 February 2022 (the date the Bill was published) and the date of their application to the ROE, presumably to claw back any last minute disposals seeking to avoid scrutiny under the Act.5 If, at the end of the transitional period an overseas entity is the registered owner of a qualifying estate in land and has not applied to register with the ROE, it and all its officers commit an offence for which the maximum penalty is an unlimited fine and two years in prison.
The Act also introduces provisions requiring overseas entities to identify and state in the ROE whether any of their registrable beneficial owners are subject to sanctions. Provisions have been added to allow HMRC to share information with the Registrar and Secretary of State for the purpose of taking action relating to offences under Part 1 and requiring overseas entities to provide additional information about trusts where one or more of the registrable beneficial owners is a trustee.
Considering the speed with which the Act passed through Parliament (15 days from publication to Royal Assent), it is fair to say that overseas entities with qualifying interests in UK land should take action now to start identifying their beneficial owners. Meticulous record-keeping and due diligence on all qualifying land disposals made after 22 February will also be vital. What remains unclear is what action, if any, authorities can take against unidentified registrable beneficial owners who, despite best efforts, remain elusive particularly where the relevant directors are also overseas. A mere lack of information may prove insufficient for the purpose of recovering property that authorities believe might be the proceeds of unlawful conduct, if they cannot prove on the balance of probabilities that (a) the property has been obtained by or (b) the owner has been involved in unlawful conduct. Further, there is nothing in the Act which will prevent the sale of the land-owning foreign corporate, rather than the land itself. Meaning that where the land is held by an SPV, the requirements to register beneficial ownership prior to disposal is somewhat toothless.
Part 2 - Unexplained Wealth Orders
UWOs were introduced into UK law by the Criminal Finances Act 2017 ("CFA") to assist authorities that were investigating property in the UK which they believed to be the proceeds of unlawful conduct, where the owner’s known income appeared to the authorities to be insufficient for the purpose of acquiring the property in question.6 UWOs empower the authorities to compel respondents to provide information about assets they own in the UK. If the respondent does not provide an adequate explanation, or provides unsatisfactory evidence, the asset will be considered "recoverable property" for the purposes of a civil recovery order or under POCA. UWOs therefore currently act as an investigative tool, with the aim of facilitating the civil recovery of assets by UK authorities.
Under the CFA as originally enacted, the court had to be satisfied on the balance of probabilities that there were "reasonable grounds" to suspect that the respondent’s known lawfully obtained income would be insufficient to allow the respondent to obtain relevant property (the "income requirement"). At the time, it was envisaged that UWOs would significantly strengthen investigators’ arsenal when it comes to investigating the suspected proceeds of unlawful conduct in the UK. So far, that expectation has not been met. Since their much-publicised launch in 2018, UK authorities have used UWOs sparingly and with varying degrees of success. To date only nine have been secured by UK enforcement agencies, in relation to four cases. The most recent case in June 2020 ended in defeat for the National Crime Agency, which was faced with costs of approximately £1.5 million.7
The Act consequently aims to strengthen the UWO regime in the following ways:
1. Scope: It expands the scope of UWOs by (a) introducing an alternative test to the income test where the applicant suspects the property in question has been obtained through unlawful conduct and (b) clarifying that a “responsible officer” of a respondent company, whether located in the UK or abroad, can be named in the UWO and required to explain the legitimacy of the source of funds used by the company to acquire property in question. Applicants will still also have to prove that either (a) the respondent is a Politically Exposed Person or (b) there are reasonable grounds to suspect that they, or someone connected with them is or has been involved in serious crime.
2. Time: It extends the determination period during which an interim freezing order has effect from 60 to 186 days, giving UK authorities more time to consider the information provided by UWO targets.
3. Costs: The availability of costs orders against UK authorities in unsuccessful UWO applications has been significantly limited to circumstances in which the authority has acted unreasonably, dishonestly or improperly.
UWOs are a valuable weapon in UK authorities' investigative armoury, which have been under-utilised since their introduction in 2018. By broadening the requirements for making a UWO and reduced the availability of costs in unsuccessful applications, Parliament hopes to incentivise authorities to use UWOs more frequently in proceeds of crime investigations. Time will tell whether these provisions will make a significant impact on utilisation, or whether other factors are at play which require rectification before they can reach their full potential, such as chronic underfunding of the National Crime Agency, Serious Fraud Office and Crown Prosecution Service.
Part 3 - Sanctions legislation
Since the invasion of Ukraine, Western and other nations have imposed an unprecedented range of sanctions on Russia. The UK has been subject to some criticism that it has been slower to impose sanctions than the U.S. and EU. One reason given for the time taken to designate various oligarchs was the threshold that it was required to apply when taking decisions to designate sanctions targets under existing legislation.
In response to the criticisms over the time taken to designate certain individuals, the Act amends the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA") to introduce an "urgent" procedure, whereby the UK can effectively mirror sanctions imposed by the U.S., EU, Australia and Canada8 subject to the Minister determining that it is in the public interest. A designation under the urgent procedure applies for an initial period of 56 days, but can be extended for a limited period based on certain conditions. Ultimately the Minister will need to comply with the test under the standard procedure if an individual is to remain designated (i.e. the Minister cannot rely on the urgent procedure indefinitely). On 15 March 2022, the UK immediately utilised the urgent procedure to designate over 300 individuals and entities that were also designated by the EU and U.S., among others. The introduction of this expedited process therefore makes a material difference to the speed at which the UK can initially impose sanctions going forward.
The Act also amends the Policing and Crime Act 2017 to introduce a "strict liability test" for monetary penalties arising from sanctions breaches.9 Previously, an individual or business was not liable for a monetary penalty if they did not have "reasonable grounds to suspect" that their activity was in breach of sanctions laws. The Act removes this requirement for monetary penalties (but not criminal penalties), meaning that the Office of Financial Sanctions Implementation ("OFSI") can issue fines on a strict liability basis where it is satisfied, on the balance of probabilities, that the person has breached financial sanctions legislation.
The Act also removes the right to request a mandatory review of civil penalties and grants OFSI additional new powers to "name and shame" individuals or firms which have, on the balance of probabilities, breached financial sanctions legislation but have not received fines. This adds an element of potential reputational damage for those who do not comply with their obligations under the sanctions regime.
While these changes certainly enhance OFSI’s ability and flexibility in pursuing cases for breaches of financial sanctions, much will depend on whether OFSI is appropriately funded and resourced to pursue additional enforcement cases. Indeed, since its inception, OFSI has only taken enforcement action against six companies.10 OFSI is a relatively small unit within HM Treasury, with limited staff, and it remains to be seen whether it has the manpower or infrastructure to effectively deliver these new powers. The Government announced in February that a new “kleptocracy cell” is being set up in the National Crime Agency to investigate sanctions evasion and it will be interesting to monitor how this unit interacts with OFSI and relevant prosecuting agencies going forward.11 Again, funding and resources will be a determining factor as to whether or not the unit is successful.
Notable, though unsurprising, in its absence from the Act was any new corporate offence of failure to prevent economic crime. The Government has made it clear that the jury is still out on this.12 A recent Parliamentary briefing paper on corporate liability for economic crime noted that there is still significant resistance to the idea of expanding the scope of the “failure to prevent” model to capture a wider range of white collar offences because of the potential adverse impact on growth and competition.13 With that said, one of the principal objectives behind the Act is to put international pressure on Russia in response to the invasion of Ukraine. The expansion of corporate criminal liability in the UK remains a domestic issue which, it appears, has been shelved for consideration at a later date.
The Act represents a significant step by UK in countering the flow of "dirty money" into the UK, and the Government is likely to encourage authorities to utilise their new powers heavily in the short term while it responds to the developing crisis in Ukraine. Although some reporting has suggested that the US and EU may look to use seized oligarch assets to pay for the rebuilding of the Ukraine,14 it should be remembered that none of the new powers contained within the Act relate to seizure. The package of measures will however provide authorities with an unprecedented picture of the assets of oligarchs in the UK, and it is arguable that this will make it easier for the authorities to seize some of those assets.
We should also keep in mind that these powers form part of broader legislative reforms aimed at preventing, identifying and punishing economic crime and recovering the proceeds. Whether these reforms will be successful in this regard on a longer-term basis remains to be seen. We may find that further steps need to be taken, including rectifying funding issues and addressing the concerns over corporate criminal liability, before anti-corruption commentators accept that the UK is doing all it can to stamp out economic crime.
1) See here.
2) See here.
3) See here.
4) Section 69(1).
5) A registrable disposition is any disposal of land which is required to be registered under the Land Registration Act 2002.
6) Dechert’s previous OnPoint on Unexplained Wealth Orders examines how the legislation worked in practice: read here.
7) NCA v Baker and others  EWHC 822 (Admin).
8) As well as any other country specified in regulations made by an appropriate Minister.
9) The monetary penalty regime for breaches of financial sanctions was introduced as an alternative to criminal prosecution.
10) See here.
11) See here.
12) See here.
13) House of Commons Library Research Briefing "Corporate Criminal Liability in England and Wales", 8 February 2022.
14) See here.