The Register of Overseas Entities and the Verification Conundrum

27 / 09 / 2022

The Economic Crime (Transparency and Enforcement) Act 2022 (“ECA”) introduced a register of overseas entities (“ROE”) and was passed on 15 March 2022 after a fast-tracked legislative process following events in Ukraine. Affected overseas entities and their advisers will need to analyse their ROE obligations and decide before 31 January 2023 whether registration is required. Registration is not straightforward and involves the registrable information being independently verified. This verification requirement is proving controversial after guidance from the Law Society highlighted the risks involved for law firms performing this service.

Background

The ROE is a new publicly searchable register that records the beneficial ownership of non-UK entities holding UK land.

An “overseas entity” is any body corporate, partnership or other legal person or entity governed by the law of a country or territory outside of the UK. “UK land” means a freehold interest in UK property or a leasehold interest in UK property granted for a term of more than seven years.

The “beneficial owner” of an overseas entity is broadly any individual or entity with more than 25% of the shares or voting rights (directly or indirectly), significant influence or control, or the right to appoint a majority of the directors. Trustees, nominees and partnerships can all be beneficial owners for these purposes. The information required on beneficial owners will depend on whether they are individuals, companies or trustees. Where a trustee is a beneficial owner, the information to be disclosed includes details of the trust, the settlor, beneficiaries and anyone with powers of control over the trust (e.g. a protector) but these details will not be subject to public disclosure on the register.

Registration requirements and deadlines

Overseas entities holding UK land before 1 August 2022 that was acquired on or after 1 January 1999 (for England and Wales) or on or after 8 December 2014 (for Scotland) must submit an application to Companies House and obtain an Overseas Entity ID number before 31 January 2023. There are anti-avoidance rules that apply to overseas entities that would have been within scope if they had not sold the relevant land on or after 28 February 2022.

From 1 August 2022 until 4 September 2022, new purchasers of UK land that were within scope must have registered and obtained an Overseas Entity ID number. They do not need this number to register their title with the relevant land registry, but they will need it when they come to sell the property.

From 5 September 2022, new purchasers of UK land that are within scope must register and obtain an Overseas Entity ID number and produce this to the relevant land registry before their title can be registered.

Consequences of non-registration

The ECA imposes criminal penalties for non-compliance, including fines of up to £2,500 per day and prison sentences of up to five years. The overseas entity will also be restricted from buying, selling, transferring, leasing or charging the land concerned.

Verification

In order to register, the information an overseas entity provides about itself and its beneficial owners must be independently verified by a “relevant person” (a subset of persons supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017). A relevant person includes financial institutions, accountants, tax advisers, lawyers and trust/company service providers.

The ROE implementation was very rapid and did not provide any time for scrutiny of the draft statutory instruments. The details around the verification process are proving to be particularly tricky. Even before the Department for Business, Energy & Industrial Strategy had circulated draft guidance, The Law Society set to prepare guidance for professionals and “Economic Crime (Transparency and Enforcement) Act 2022: Law Society guidance for solicitors concerning verification” was issued on 29 July 2022. The Society of Trust and Estate Practitioners issued their own guidance note on 28 July 2022: “UK Register of Overseas Entities – Verification of trust information”. Both sets of guidance make it very clear that the test for registrable beneficial owners (despite using the same words) is a different test than for the “know your client” (“KYC”) requirements for anti-money laundering purposes. Relevant persons who have undertaken KYC on an overseas entity client will not necessarily be in a position to verify information for that entity to Companies House. Further, consideration must be given to the application of relevant data protection laws, and whether verification services would be covered by professional indemnity insurance. There may also be problems in obtaining the requisite documents on certain beneficial owners as these must come from a reliable source independent of the person being verified. There is no statutory position as to what represents an independent source, but The Law Society’s guidance seeks to set out a position of what might reasonably be treated as an independent source for these purposes.

ROE verification includes verification of the nature of control and, therefore, requires the verifier to conduct a legal analysis of the ownership structure in order to determine the accuracy of the proposed disclosure.

The Law Society has highlighted that lawyers who get this wrong will leave themselves open to criminal prosecution and may be professionally negligent (the same will apply to other professionals), and that “extreme caution” must be exercised. The ROE is complex and requires specialist company law experience. In all cases, it will be necessary to deal with overseas jurisdictions. A familiarity with international corporate forms and trust laws is invaluable. It is expected that many law firms will be unable or unwilling to conduct ROE verification.

In practice, many within the professional and fiduciary community (including lawyers, accountants and trustees) are now offering ROE advisory and verification services for their existing clients. There has been less appetite to provide such services more widely because of the significant risks involved and the current lack of a risk-based approach to enforcement. For those that are prepared to offer the service, having the expertise to conduct the correct analysis is vitally important. Under s.12 of the ECA, before making a registration application an overseas entity is required to serve an information notice on those it knows, or has reasonable cause to believe, is a registrable beneficial owner. There is a widespread misunderstanding of the manner in which a s.12 notice should be handled and a verifier should be alert to this. When the people with significant control (“PSC”) register (part 21A Companies Act 2006 (as amended)) was introduced, errors were uncovered in registration applications and there is a concern that the same could happen with the ROE. The major difference between the ROE and the PSC regimes, however, is that the ROE regime can place specific criminal liability on the adviser for making errors.

Future developments

The UK government has stated that it will introduce a second Economic Crime Bill in this Parliament. It is hoped this will allow the legislative opportunity to clarify the verification requirements and introduce a reasonable and risk-based approach, as is the case for KYC.

In the meantime, law firms, and other relevant persons, must familiarise themselves with the details of the verification process, weigh up the risks involved, and consider their options.

Wedlake Bell have been working closely with the Department of Business, Energy & Industrial Strategy, Companies House, HM Land Registry and other stakeholders on the implementation of the ROE regime. One of our corporate partners, Edward Craft, was responsible for The Law Society guidance document. We are pleased to advise clients on compliance with the new regime.