Economic Crime (Transparency and Enforcement) Act 2022

On 15 March 2022 the long-awaited Economic Crime (Transparency and Enforcement) Act 2022 (‘the Act’) came into force.

Introduction

For many years there has been increasing concern about asset ownership in the UK and the need to ensure transparency of ownership in an effort to prevent “dirty money” being used to purchase UK property. Indeed as long ago as 2016, David Cameron speaking at an anti-corruption summit warned foreign companies against corruption and signalled that an international agreement had been reached to create a register for the beneficial ownership of property. Despite his strong remarks, little was done to put this into practical effect.

Following Russia’s invasion of Ukraine, the Act was fast tracked to give effect to the necessary economic sanctions against Russia. Designed to make it easier to identify and trace illicit wealth, the Act comprises three key sections:

• Part 1: The Creation of a Register of Overseas Entities
• Part 2: Amendments to the Unexplained Wealth Order regime
• Part 3: Amendments to the existing legislation on UK sanctions

Part 1: The Creation of a Register of Overseas Entities

Sections 1 to 44 of the Act establishes a new public register of beneficial owners of non-UK entities that own or buy land in the UK, operated by the Companies House registrar.  Designed to identify criminal and corrupt assets and prevent money being laundered through complex corporate structures, the Act applies to any ‘overseas entity’ defined as any body corporate, partnership or other entity that is governed by the law of a country other than the UK. It applies retrospectively for land acquired in England and Wales by foreign entities since 1 January 1999 and in Scotland since 8 December 2014.

A beneficial owner needs to be registered if they hold more than 25% of the shares or voting rights in an entity; can appoint or remove a majority of its directors; or have some other significant influence or control over it.

The Act places upon beneficial owners of overseas entities a number of compliance requirements including:

• Once the Act is in force, overseas entities already owning registered land have 6 months in which to become registered.
• As part of their application, overseas entities will be required to state that they have complied with a duty to take ‘reasonable steps’ to identify and provide information about their registrable owners.
• Overseas entities are subject to an annual updating duty, a failure to comply will also be a criminal offence, punishable by daily fines of up to £2,500.
• Providing false or misleading information to Companies House is also a criminal offence and will prevent the overseas entity from being able to buy or sell UK property in the future.
• A transfer of land in breach of the registration requirements is also a criminal offence punishable by a fine or up to five years’ imprisonment for every responsible officer.

A 6-month transition period between the Act coming in force and the requirement to be registered applies although the Act does have immediate relevance. To prevent the transfer of land prior to the coming into force of this section, overseas entities must disclose any sales or other dispositions of land made on or after 28 February 2022.

Whilst no fixed date has been provided for when the register will go live, a Statutory Instrument (SI) for the register of Overseas Entities (delivery, Protection and Trust Services) Regulations 2022 was laid in Parliament on 22 June 2022 and was scheduled for a Grand Committee debate on 12 July 2022. It is anticipated therefore that this section should come into force imminently. The SI appears to confirm that which was anticipated namely that the register will operate as a digital service and is likely to launch at some point on GOV.UK this summer.

Part 2: Amendments to the Unexplained Wealth Order Regime

The existing regime

Unexplained Wealth Orders (‘UWO’) under section 362A - IA of the Proceeds of Crime Act 2002 are investigatory orders placed on a respondent to explain the origins of their wealth. Nicknamed ‘McMafia Orders’ when first implemented in 2018, UWOs were intended to target those whose assets appear disproportionate to their income. They can be obtained in respect of property if it is thought to be held by Politically Exposed Persons or those reasonably suspected of being involved in serious crime and their associates. They require the respondent to explain their interest in property and how they obtained that interest.

UWOs were introduced in the Criminal Finances Act 2017 to overcome the problem of meeting the burden of proof required for a Civil Recovery Order in relation to criminal conduct in difficult cases, particularly of money-laundering, where the person in question had the support of a foreign regime. UWOs are not freestanding powers to seize or confiscate assets, but they give law enforcement an opportunity to confiscate criminal assets valued at over £50,000 without having to prove that the property was obtained from criminal activity. UWOs can in principle make the confiscation or forfeiture of assets through civil recovery easier, because if a person fails to comply with the UWO without reasonable excuse, the regime establishes a presumption that the property should be confiscated – reversing the burden of proof onto the respondent in civil recovery proceedings.

To grant a UWO, the court must be satisfied that the respondent holds the relevant property and that there are reasonable grounds for suspecting that the respondent’s known sources of lawfully obtained income are not sufficient to enable them to obtain the property (often called ‘the income requirement’). The Court will decide a fixed period within which a response must be given. Depending on what is required by the order, the response might involve written answers, the production of documents or other evidence such as tape-recorded statements. When applying to the court for a UWO, the relevant enforcement authority will usually apply at the same time for an interim freezing order, which normally expires 60 days after the response to the UWO. It prevents persons dealing with the property while the UWO procedure is followed.

If a person knowingly or recklessly responds to a UWO in a false or misleading way, that is a separate criminal offence punishable by up to two years’ imprisonment.

Although it was predicted that there could be as many as 20 UWOs per year, in fact they have been issued just nine times in total, in relation to four cases. Various law enforcement agencies have the authority to apply for them (NCA, HMRC, FCA, SFO and the CPS), but in practice only the NCA has applied for UWOs, with limited success. There have been no new UWOs since the end of 2019 and in April 2020 three of the UWOs that had been issued were discharged when the High Court^[1] criticised the basis for the NCA application and the investigation of assets.  The consequence was a costs bill of about £1.5 million, which amounts to more than a third of the entire £4.3 million budget of the NCA’s international anti-corruption unit. Although there has been a global pandemic since the judgment in Baker, it may be no coincidence that there have been no further orders since the NCA had its fingers burnt.

Meanwhile the latest HM Treasury and Home Office risk assessment of money laundering and terrorist financing (December 2020) indicated that there was “a realistic possibility that the amount of laundered money in the UK is in the hundreds of billions of pounds annually.” A home office briefing for reforms to the UWO regime in 2022 noted that UWO’s had recovered £10m in criminal property since their introduction. That is a miniscule return – particularly since it was obtained from a professional enabler for criminal gangs the in the midlands who apparently provided the NCA with 137 files of evidence leading to a much larger investigation of himself – so he settled for £10m without a further fight.

The House of Commons Foreign Affairs Committee observed in a report in June 2022 that “in practice, it seems that UWOs have been spectacularly unsuccessful.”^[2] They have done virtually nothing to address the issue of dirty money passing through and invested in UK property and have proved to be ineffective in cases involving complex structures.

Reforms

The changes introduced by the 2002 Act were aimed at improving the UWO regime. The Home Office suggested that these changes – in force since 15 May 2022 – would “increase operational confidence” in the use of UWOs:

1. Adding a further category of persons against whom an UWO can be made: “Responsible officers” of an entity that owns property can now be subject to an UWO. This includes a director, manager or partner of a partnership, both inside or outside the UK and is intended to allow law enforcement to seek information from officers of legal entities thought to have control over property, even if they do not own the property. It may assist law enforcement to navigate the use of complex structures to hide the true owner of property, and may allow information to be sought more easily.
2. Adding a further alternative test for granting UWO: Further to the income requirement, the Act introduced other grounds for granting a UWO where “there are reasonable grounds for suspecting that the property has been obtained through unlawful conduct.” This means it is no longer necessary to look at a person’s source of wealth or income to obtain a UWO. The Government believes this will help law enforcement to meet the evidential standard to obtain a UWO, even where the property is held through a complex structure causing difficulties gathering evidence of income for the ultimate beneficial owners of the property. This is because it would allow a UWO to be obtained on the basis that dirty money was used to buy the property, rather than having to show evidence relating to the known income of the owner of the property being insufficient to fund its acquisition. Often property is held by nominees who have no real beneficial interest in the relevant property, so the income requirement may not otherwise be met.
3. Providing costs protection for law enforcement: Perhaps the most significant change from the perspective of law enforcement was in response to concern that the potential costs of obtaining (or failing to obtain) UWOs were deterring applications.  The Act implements statutory costs protection in that a court cannot an order requiring the enforcement authority to pay costs to the respondent unless the authority has acted unreasonably, dishonestly, or improperly.
4. Extending interim freezing orders: Previously interim freezing orders in connection with UWOs would expire 60 days after the UWO response. The regime now allows for that period to be extended two further times up to a maximum of 182 days to allow enforcement authorities to review (and act on) material provided in response to a UWO, before the interim freezing order expires. To grant the extension, the court must be satisfied that the enforcement authority is “working diligently and expeditiously”, that further time is needed, and that the extension is reasonable

Part 3: Amendments to the existing legislation on UK Sanctions

A key change arising from the Act is the toughening up of the current Sanctions regime. Prior to the Act the Office for Financial Sanctions Implementation (OFSI) could only impose monetary penalties on a person who breached financial sanctions if they knew or had reasonable cause to suspect that they were in breach. As of 15 June 2022, Chapter 1 and Part 3 has come into force. By removing the requirement for knowledge or suspicion, the Act essentially creates a strict liability basis and therefore easier basis upon which sanction breaches can be imposed.

Additionally, the Act extends the powers for OFSI to name and shame by publishing reports on those who have failed to comply with the obligations. Where OFSI is satisfied on the balance of probabilities that a person has breached a prohibition or failed to comply with the sanction’s regime, it is permitted to publish these reports as it considers appropriate even if no fine has been imposed on them.

The final key feature of this amendment is the Act permits the designation of individuals or entities for 56 days on an “urgent procedure” basis if they have been designated by another country (the United States, the European union, Australia, Canada or elsewhere as specified by the regulations), despite the absence of reasonable grounds to suspect that they have been involved in sanctionable conduct.

These provisions are to ensure that it is easier to bring enforcement action in respect of breaches of sanctions legislation and to act as a deterrent to future sanction breaches.

Reform of Companies House

The wider reforms of Companies House are at the front and centre of the transformation programme. This is to enable Companies House to play a much broader role in tackling economic crime and improving transparency.  The role of the Registrar is set to fundamentally change - instead of the remit being the registering of company information it will now include promoting and maintaining the integrity of the register of companies and the UK’s business environment.

Some of the changes being considered as part of this transformation are set out below:

• Anyone setting up, running, owning or controlling a company in the UK will need to verify their identity with Companies House.
• Companies House will be given the power to challenge suspicious information, both pre and post registration and to inform security agencies of potential wrongdoing. There is the capacity for greater information sharing generally.
• It will be possible to appoint corporate directors provided that (1) all directors of the corporate director are themselves natural persons; and (2) those natural persons are, prior to the corporate director appointment, subject to an appropriate identity verification process.
• The filing requirements for small and micro companies will be simplified, with all small companies being required to file all the constituent parts of their accounts.
• As well as the new power to query information (which will also apply to company accounts), enhanced validation checks on financial information will be introduced.
• A requirement that companies' accounts are filed in a digital format at Companies House using the industry standard ‘Inline Extensible Business Reporting Language’ (iXBRL) and that information is fully tagged so that the information is easier to interrogate, compare and check;
• Reducing the filing options for micro-entities and small companies  ‘abridged’ and ‘filleted’ accounts will no longer be an option

There will be a range of sanctions available for failure to respond, or respond appropriately, to the Registrar’s queries which are likely to include criminal sanctions.

Conclusion

A host of wide-reaching measures have been brought in by the Act, although not all are in force, the remaining sections are expected to come into force in the coming months. It is clear that the Government wants to be seen to be tackling economic crime, but the extent of new requirements and powers introduced by the Act can only be effective if the agencies tasked with using them are properly resourced. A second Economic Crime Bill was due before the summer term, although given the current disarray of Government this may find itself downgraded on the agenda of priorities. There are reputational impact considerations for companies to contemplate such as the ability of OFSI to ‘name and shame’ even in the absence of being financially penalised under the regime or being linked to a person subject to a UWO which will need to be carefully considered particularly as further legislation is introduced.