European Union: Economic Crime (Enforcement And Transparency) Act 2022

Following the Russian invasion of Ukraine, sanctions imposed by the UK and other jurisdictions, largely against high-profile Russian individuals and companies, have been firmly in the headlines.

The Economic Crime (Enforcement and Transparency) Bill (the "Bill") was put forward as a further tool to combat laundered money entering the UK, in particular from Russia. This Bill received Royal Assent on 14 March and became the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act"). The passing of the act has flown largely under the radar in comparison to the sanctioning of oligarchs, however, has been described by some commentators as one of the most significant legislative developments in recent years.

The Act is split into three key parts:

1. Registration of Overseas Entities

Part 1 of the Act introduces a requirement for the registrar of companies to set up a register of "Overseas Entities", defined as legal entities "governed by the law of a country or territory outside the UK"¹. The Secretary of State is entitled to require any overseas entity holding certain property interests to apply for registration on six months' notice. The register, which will include details of beneficial owners of overseas entities, is intends to make it harder for individuals to conceal ownership behind complex, often offshore corporate structures. It is hoped this will discourage illicitly acquired wealth being used to finance acquisition of UK property.

The regime will apply retrospectively to property acquired from January 1999 for property in England and Wales and from December 2014 in Scotland. Any person can apply to see the register, but it is worth noting that certain personal information will not be included for public inspection.

Critics of the Bill were concerned that a provision permitting exemptions in the interests of the "economic well-being of the UK" would open the door to the lobbying of Government on behalf of oligarchs and other influential owners. The Act does away with this exemption. The initial transition period of 18 months was also curtailed to six to provide companies and the registrar sufficient time to put this new register in place without providing so much time that beneficial owners would simply dispose of relevant property during the transition period. However, concerns remain amongst lawmakers as to whether this length of time could still render the register ineffective.

The House of Lords sought to redress this by including a requirement for foreign owners to disclose beneficial ownership if they sold UK property between 28 February 2022 (four days after Russia's invasion of Ukraine) and the end of the six-month transition period. Although this provision was included in the Act (section 41), it is noteworthy that the Government has not indicated when the new regime will formally begin. This will be determined by secondary legislation at a date decided by the Secretary of State and means that these transitional provisions shall remain in force for the time being.

2. Unexplained Wealth Orders ("UWO")

UWOs were introduced in 2018. They are an investigative tool designed to enable law enforcement to identify and seize property suspected to have been bought with criminal funds. A UWO places the burden of proof on the subject of the order to explain the underlying source of wealth used to purchase the assets under investigation. However, only four UWOs have been granted under the previous regime and many concerned it lacks teeth. The Act seeks to make it easier for UWOs to be granted.

Previously, two categories of people could be served with a UWO: politically exposed persons and persons suspected of being involved in serious crime. The Act creates a new category including "responsible officers" of an entity which owns property. Responsible officers include directors, managers or partners, as well as "any person in accordance with whose directions or instructions the board of directors or equivalent body of the respondent are accustomed to act"². It also extends to include such a person outside of the UK³. It is hoped that this broader definition will assist law enforcement officers when seeking information regarding property held in trust or owned by shell companies.

The Act also extends the test to be satisfied for granting a UWO. Prior to its implementation, the court had to be satisfied that "there are reasonable grounds for suspecting that the known sources of the respondent's lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property". This has now been extended to include property suspected of being obtained through "unlawful conduct", as defined by section 242 of the Proceeds of Crime Act 2002⁴.

Further, the Act has strengthened the existing powers by extending the period for which an interim freezing order may take effect (from 60 days up to a new maximum of 186 days).

3. Sanctions

The Office of Financial Sanctions Implementation ("OFSI") is the UK's sanctions enforcer.

The Act removes the existing requirement that people must have known or suspected that they breached sanctions law to receive a monetary penalty and allows the OFSI to enforce on a lower, strict liability basis. This brings the OFSI's powers in line with other UK allies, notably the US sanctions regimes.

The Act also grants the OFSI the power to publicly name companies that have breached sanctions, but have not been fined. It is hoped that this will be a deterrent to companies committing even minor breaches.

An "urgent procedure" for designating an individual or entity as a sanctions target is a further new feature under the Act. This streamlines the process for enacting new sanctions regulations and makes it simpler to designate persons if they have been subject to sanctions imposed by certain other countries, including the US and European Union. This new 'mirroring' provision was relied on for the purpose of sanctioning a large number of individuals in relation to Russia (and Belarus) only a few hours after the Act was passed⁵.

Commentary

Some practitioners have expressed concerns that certain self-reporting mechanisms required by the Act may prove a fruitless venture. If firms are intent on money laundering, a provision requiring them to truthfully provide details of UBOs is unlikely to be effective.

There are also broader practical concerns regarding how enforcement agencies are meant to police the retrospective requirements. In England & Wales, the Act will require companies to re-submit information regarding property dating back over 20 years. In Scotland it is a more modest 8 years. In both cases, it is unclear how Companies House will cope with creating this new register, even with the government's additional £20m budget top-up this year. Analysts remain sceptical that even the £63m earmarked for this project will be enough.

Although there are concerns the Act may prove to be expensive window dressing against financial crime, optimists point to the strict liability nature of the fines regime as hopefully acting as a deterrent. Whereas the OFSI has previously been a blunted tool in the UK enforcement arsenal (only issuing six fines in its six-year existence), this lower civil threshold may see it move to the forefront of enforcement organisations.

Finally, it is worth noting that Government has stressed that this Act is only the first step in expanding the way it tackles financial crime. A second Economic Crime Bill is expected to be laid before Parliament later this year with a focus on limited partnerships and, more intriguingly, new powers to seize cryptocurrency assets. Watch this space.

Footnotes

1 S.2(1) of the Act.

2 S.45(7) of the Act.

3 S.45(3) of the Act.

4 S.242 "Property obtained through unlawful conduct":

(1) A person obtains property through unlawful conduct (whether his own conduct or another's) if he obtains property by or in return for the conduct.

(2) In deciding whether any property was obtained through unlawful conduct—

5Foreign Secretary announces historic round of sanctions on Russia, 15 March 2022, https://www.gov.uk/government/news/foreign-secretary-announces-historic-round-of-sanctions-15-march-2022

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