On 14 March 2022, the U.K. Parliament passed the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") in response to Russia's invasion of Ukraine on 24 February 2022. This is "An Act to set up a register of overseas entities and their beneficial owners and require overseas entities who own land to register in certain circumstances; to make provision about unexplained wealth orders; and to make provision about sanctions." The Act is U.K.-wide with variations for Scotland, Northern Ireland, and England and Wales.
There are three key parts to the Act:
1. the creation of a Register of Overseas Entities (Part 1, sections 1-44, "Registration of Overseas Entities");
2. amendments to the Unexplained Wealth Order regime (Part 2, sections 45-53, "Unexplained Wealth Orders"); and
3. amendments to the existing legislation on U.K. sanctions (Part 3, sections 54-66, "Sanctions").
The Act's headline provision is Part 1, the creation of a Register of Overseas Entities (the "Register"). This aims to prevent criminals hiding their property ownership behind opaque corporate structures and using the U.K. to launder money. Part 1 will put overseas and U.K. based entities on the same footing given that U.K. companies are already obliged to disclose their beneficial owners to Companies House.1
Registration of Overseas Entities
The Register will be the third U.K. register of beneficial ownership. All overseas entities that purchase a freehold or leasehold estate (for a term of more than 21 years)2 under the Act in the U.K. must identify their beneficial owners and register.
An overseas entity is any company or similar legal entity that is governed by the law of a country or territory outside the U.K. An individual, government, public authority, or corporate entity will be considered a beneficial owner of an entity if it:
1. holds directly or indirectly more than 25% of the shares or voting rights in that entity;
2. has the right to appoint or remove the majority of the board of directors of that entity; or
3. has the right to exercise or actually exercises significant influence or control over the activities of that entity.
Companies House aims to implement the Register as quickly as possible although a date has not yet been specified. Importantly, the registration requirement under the Act applies retrospectively to overseas entities that purchased property on or after 1 January 1999 in England and Wales or on or after 8 December 2014 in Scotland. Such overseas entities will have six months from the commencement date to submit the required information. Any overseas company selling property between 28 February 2022 and the full implementation of the Register must also submit their details to the registrar of companies at the point of sale. Once registered, an overseas entity ID will be provided, and the overseas entity will be required to update its information annually until it is removed from the Register. An overseas entity cannot register as the owner of the relevant interest in land unless, at the time of application, the entity is a registered overseas entity or is exempt from registration (for example, the Secretary of State may exempt certain entities from registration, if necessary, for national security or to prevent or detect serious crime).
An overseas entity that does not submit the required details to the Register will be subject to restrictions on selling, mortgaging, and/or granting leases in relation to its U.K. property. Failure to comply with the registration obligations is a criminal offence for the relevant entity and for each of its officers that is punishable by a daily fine, imprisonment of up to five years, or both.
Advice to Lenders
Pending Companies House's establishment of the Register, lenders should:
1. identify affected transactions where an overseas entity has granted security over property located in the U.K. as collateral for a loan, or otherwise has overseas ownership; and
2. check (and, if necessary, amend) finance documents to ensure that they include obligations on borrowers and other obligors to comply with all their obligations under the Act or ensure that the documents impose sufficiently wide "compliance with laws" duties.
Once the Register is established, lenders should require:
1. the provision of overseas entity IDs as conditions precedent on relevant transactions;
2. relevant overseas entities to comply with the Act's updating and compliance obligations; and
3. borrowers and other obligors to ensure registerable leases that are granted from the secured property are only granted to overseas entities that are compliant with the Act.
Advice to Overseas Entities
Given that the registration obligations are retrospective and that there is only a six-month grace period, overseas entities should review their portfolio to determine whether the Act applies to their property interests. Overseas entities who have granted or wish to grant security over U.K. property should:
1. register before the expiry of the six-month transitional period; and
2. remember that any relevant disposition of U.K. property from 28 February 2022 will trigger a registration obligation.
1. Economic Crime (Transparency and Enforcement) Act 2022 and Policy Paper - Fact Sheet: The Register of Overseas Entities (updated 4 March 2022). See also Brown Rudnick's previous alert: Breaking 'Londongrad'? The Economic Crime (Transparency and Enforcement) Act 2022 by Anupreet Amole, published on 16 March 2022.
2. This is 7 years for an overseas entity to which the Act's six-month transition period provisions are applicable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.