UK Draft Bill Addresses Criminal Money Laundering Through Overseas Entities

Jones Day
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Jones Day

In Short

The Situation: The purchase of property in the United Kingdom has, for various reasons, become an attractive mechanism by which to launder criminal proceeds through overseas entities.

The Solution: A draft bill is currently being considered which seeks to tackle the issue and increase transparency with the introduction of a register to record information about the beneficial ownership structure of overseas entities that hold or are acquiring property in the United Kingdom.

Looking Ahead: Having considered the views of a Joint Committee on the first draft of the Bill, the UK Government is now contemplating possible updates and improvements to the drafting, with a view to establishing a fully operational register by 2021.

What Is the Registration of Overseas Entities Bill?

The Government published a draft bill on the registration of overseas entities ("ROE Bill") on 23 July 2018 with the aim of increasing transparency regarding ownership of land in the United Kingdom. Currently, the democratic political environment, internationally respected legal system and financial protections in the United Kingdom has made the purchase of property in the United Kingdom an attractive mechanism by which to launder criminal proceeds through overseas entities. This situation is exacerbated by the facts that: (i) unlike countries such as New Zealand, India and Switzerland, ownership of land in the United Kingdom is permitted by entities based overseas; and (ii) enforcement agencies in the United Kingdom often encounter difficulties in accessing information about those who own or control such overseas entities.

In order to tackle this problem, and to maintain the integrity of the UK property market, the ROE Bill seeks to establish a publicly accessible register of the beneficial owners of overseas entities who are not exempt and who are either existing owners of, or are purchasing, land in the United Kingdom ("ROE Register"). The ROE Register will be managed by Companies House and will operate in tandem with other anti-money laundering initiatives which include: (i) the People with Significant Control ("PSC") register; (ii) suspicious activity reports; (iii) unexplained wealth orders; and (iv) the Fifth Anti-Money Laundering Directive (due to come into force by 10 January 2020 and pursuant to which beneficial ownership registers will be made public and the United Kingdom will be obliged to implement mechanisms to verify the information included on such registers). Once on the ROE Register, overseas entities will be required to update their beneficial ownership information, or confirm that the information on the ROE Register remains accurate, annually.

Current Status of the ROE Bill

A Joint Committee published a report addressed to the House of Lords and the House of Commons which considered the ROE Bill in draft form and set out a number of recommendations as to how it could be improved ("Joint Committee Report") on 20 May 2019. This report has been considered by the Government, which published its views in response in July 2019 ("Response"). It was stated in the Response that the Government anticipates that the ROE Register will be operational in 2021.

The Meaning of "Overseas Entities"

The ROE Bill defines "overseas entities" as legal entities that are governed by the law of a country or territory outside the United Kingdom. To constitute legal entities, such overseas entities must be body corporates, partnerships or other entities which are considered legal persons under the law by which they are governed. However, not all overseas entities which are either existing owners of, or are purchasing, land in the United Kingdom will be required to register details of their beneficial owners. Pursuant to the ROE Bill, the Secretary of State is afforded the authority to introduce secondary legislation exempting certain overseas entities from the requirement to register their beneficial ownership.

In the Joint Committee Report, the Joint Committee called for: (i) the publication of guidance by the Government as to the correct interpretation of the definition of "overseas entities"; and (ii) the allocation of responsibility for making determinations as to the legal personality of an entity (and therefore whether or not it falls within the scope of the ROE Bill) to Companies House. This was based on the fact that companies may not know whether or not they constitute legal entities for the purposes of the ROE Bill.

The Government disagreed in the Response that UK agencies such as Companies House should be afforded the (frankly judicial) role of determining the legal personality of entities, and considered that overseas entities are likely to already be aware of their legal status. It did, however, propose to publish guidance notes to ensure that the provisions of the ROE Bill are as clearly enumerated as possible. The Government also noted that, although third parties in the United Kingdom transacting with overseas entities subject to the Bill may be less likely to be aware of the legal status of such entities (and the attendant legal obligations under the ROE Bill such status can involve), conveyancers involved in such transactions should be in a position to bring this to the awareness of such third parties.

The Meaning of "Beneficial Owner"

The ROE Bill's classification of "beneficial owners" mirrors that used within the PSC regime, according to which a beneficial owner of an entity is one which satisfies at least one of a number of conditions, one being that he holds, directly or indirectly, more than 25% of the shares in that entity. The Government has rejected the Joint Committee's recommendation that this percentage be lowered in order to capture all true beneficial owners of overseas entities, on the basis that, according to both the ROE Bill and the PSC regime, persons that do not hold more than 25% shares in an entity will still be considered beneficial owners to the extent that they exert"significant control" over the entity. Furthermore, the figure of 25% is also consistent with other domestic and international anti-money laundering regulations. The Government has, however, committed to providing further guidance as to the meaning of "significant control".

Exempt Entities and Persons

As currently drafted, the ROE Bill provides that any entities deemed exempt from the regime pursuant to secondary legislation made by the Secretary of State will neither have to publicise beneficial ownership information on the ROE Register or provide such information to Companies House.

The Joint Committee Report recommends the amendment of the ROE Bill to address this fact, as it considers that certain types of entity, such as foreign governments, should still be required to provide beneficial ownership information to Companies House despite not having to publicly disclose it.

The Government disagrees with this suggestion and has indicated that it is considering exempting foreign governments from the regime, given that: (i) there are no clear registrable beneficial owners of foreign governments; (ii) direct purchases by foreign governments will be visible on land registries; and (iii) overseas entities through which foreign governments attempt to purchase property will, themselves, be subject to registration. However, given the potential for expansive exemptions to undermine the efficacy of the ROE Bill, the Government has agreed that it is appropriate that the power to introduce exemptions to the regime by way of secondary legislation should be subject to the affirmative resolution procedure (which requires Parliamentary approval).

The ROE Bill also currently provides for the Secretary of State to exempt individuals who would otherwise qualify as registrable beneficial owners of overseas entities which own or are purchasing land in the United Kingdom from being counted as such. The Secretary of State may exempt individuals in this way only if he is satisfied that there is a special reason why such individuals should be exempted. Given the arguable lack of clarity as to what will constitute a "special reason", and the fact that the legislative intention is that the power only be used sparingly, the Joint Committee's recommendation (which the Government is still considering) is that all reasons which would qualify as sufficiently special for this purpose be enumerated within the ROE Bill.

Modified Application and Update Requirements

The ROE Bill additionally provides that the Secretary of State may modify the requirements for applying and updating registrations in respect of registrable overseas entities where appropriate, in light of certain information that is already publically available. The Explanatory Notes which accompany the ROE Bill and which were published on 23 July 2018 ("Explanatory Notes") clarify that an example of information which would warrant modification in this way is beneficial ownership information relating to that entity contained on an "equivalent" overseas register. The Joint Committee Report, with which the Government agrees, recommends that such "equivalent" registers should be publically accessible and that users should be provided with links to such registers.

Consequences of Failing to Register

The current draft of the ROE Bill provides that beneficial owners who are subject to the requirement to register, and who fail to do so, will be subject to sanctions which include: (i) being restricted from acquiring, letting and disposing of property in the United Kingdom; and (ii) being held criminally liable for the breach. The Joint Committee Report has recommended that the ROE Bill also introduce civil penalties for such behaviour, on the basis that they are likely to be easier than criminal sanctions to enforce abroad, which the Government, in its Response, has stated that it will consider further.

The ROE Bill envisages a transition period of 18 months before which sanctions would be enforceable in respect of overseas entities that fall within the ROE Bill's scope because they already own land in the United Kingdom. This transition period would afford entities that would prefer that information about their beneficial owners not be made public the opportunity to sell any UK property before they become subject to the ROE Bill's registration requirements.

Tackling Potential Loopholes

The Joint Committee Report expressed concern as to how trusts would fit within the regime set out by the ROE Bill (and also the impending introduction of the Fifth EU Anti-Money Laundering Directive), given that they do not have legal personality and cannot directly hold land. The Government has clarified that, while trusts themselves would not be subject to the new regime, overseas entities holding land on behalf of trusts would be required to list details as to their beneficial ownership. Furthermore, offshore trusts that generate UK tax consequences (which most land-owning trusts do) are already required to provide beneficial ownership information to the Trust Registration Service ("TRS"). Whilst information listed on the TRS register is currently accessible only to law enforcement bodies, the Government envisages, with the transposition of the Fifth Anti-Money Laundering Directive in the United Kingdom, this being broadened to include individuals who can demonstrate a legitimate interest in accessing such information. The Government also envisages the scope of the TRS regime being expanded to include non-EEA trusts which acquire real estate in the European Union.

Next Steps

All overseas entities which own and/or intend to acquire property in the United Kingdom should be aware of the fact that, once the ROE Bill is enacted, they are likely to be obliged to register information about their beneficial ownership structure. It remains to be seen how the changes suggested in the Joint Committee Report and supported by the Government in its Response are incorporated into the current draft of the ROE Bill.

Four Key Takeaways

  1. The ROE Bill seeks to tackle money laundering via the purchase of property with the introduction of a register to record information about the beneficial ownership structure of overseas entities that hold or are acquiring property in the United Kingdom.
  2. Overseas entities which own and/or intend to acquire property in the United Kingdom should be aware of the fact that, once the ROE Bill is enacted, they are likely to be obliged to register information about their beneficial ownership structure.
  3. Entities that would prefer that information about their beneficial owners not be made public should consider selling any UK property before the envisaged 18-month transition period expires and they become subject to the ROE Bill's registration requirements.
  4. It remains to be seen how the changes suggested in the Joint Committee Report and supported by the Government in its Response are incorporated into the current draft of the ROE Bill.

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