The Economic Crime Act: What Will Change For Managers Of Offshore Structures

In the ear­ly hours of 15 March 2022, the Economic Crime (Transparency and Enforcement) Act (the “Act”) received roy­al assent. The rapid pas­sage of the Act through the UK Parliament, after years of delays, came in response to Russia’s inva­sion of Ukraine in February 2022. The Act is, in part, ful­fil­ment of long-await­ed pro­vi­sions intend­ed to “improve trans­paren­cy about who owns over­seas enti­ties that own land in the UK and to act as a deter­rent to peo­ple who may try to laun­der mon­ey” and also part of the UK’s strat­e­gy, in par­tic­u­lar through enhance­ments to the UK’s sanc­tion regime, to move more swift­ly to des­ig­nate those peo­ple iden­ti­fied as play­ing a part in the inva­sion of Ukraine.

While the pri­ma­ry tar­get of the Act is, in the words of UK Home Secretary Priti Patel, the “mob of oli­garchs and klep­to­crats who have abused the finan­cial sys­tem and the rule of law for too long”,1 cor­po­rate trans­paren­cy reform­ers have been dis­ap­point­ed, espe­cial­ly with the Register of Overseas Entities, that where prop­er­ty is held through com­plex off­shore struc­tures involv­ing nom­i­nees, the ulti­mate indi­vid­ual ben­e­fi­cial own­er still avoids prop­er iden­ti­fi­ca­tion. However, in prac­tice, and fol­low­ing amend­ments made through Parliament, a num­ber of the Act’s pro­vi­sions will have a sig­nif­i­cant impact on those who man­age off­shore struc­tures and their clients by strength­en­ing indi­vid­ual account­abil­i­ty and increas­ing expo­sure to rep­u­ta­tion­al, civ­il, and crim­i­nal lit­i­ga­tion risk.

This arti­cle exam­ines the effect the rel­e­vant pro­vi­sions of the Act will have on the fidu­cia­ry ser­vices sec­tor and admin­is­tra­tors of over­seas enti­ties which own prop­er­ty in the UK.

Part 1: Register of Overseas Entities (the “ROE”)

The Act will cre­ate an ROE admin­is­tered by Companies House, which will require over­seas enti­ties pur­chas­ing UK prop­er­ty to pub­licly reg­is­ter their iden­ti­ties as well as the iden­ti­ties of the ben­e­fi­cia­ries of the over­seas enti­ty. This par­tic­u­lar reform is long-await­ed – it was first described as one of many “ground­break­ing com­mit­ments that can real­ly trans­form [the UK’s] abil­i­ty to tack­le cor­rup­tion” at an anti-cor­rup­tion sum­mit in 2016 by then Prime Minister David Cameron.

In effect, the new ROE will mir­ror the exist­ing reg­is­ter of “peo­ple with sig­nif­i­cant con­trol” (“PSC”) that was cre­at­ed in 2016 for UK enti­ties pur­suant to the Small Business Enterprise and Employment Act 2015. Now all legal non-UK enti­ties that own or wish to own UK land (com­mer­cial or res­i­den­tial, lease­hold or free­hold) will need to reg­is­ter with Companies House, take rea­son­able steps to iden­ti­fy its reg­is­tra­ble ben­e­fi­cial own­ers and pro­vide the infor­ma­tion spec­i­fied (in sec­tion 4 and Schedule 1 of the Act) about these beneficiaries.

The var­i­ous con­di­tions for what defines a “reg­is­ter­able ben­e­fi­cial own­er” are set out in Schedule 2 of the Act and include indi­vid­u­als who hold more than 25 per­cent of the shares or vot­ing rights in the over­seas enti­ty or have some oth­er sig­nif­i­cant influ­ence or con­trol over it (includ­ing through a trust or part­ner­ship struc­ture). Significant influ­ence and con­trol is not defined in the Act; how­ev­er, statu­to­ry guid­ance in rela­tion to the con­cept with­in the PSC regime offers insight into its mean­ing. The guid­ance illus­trates sig­nif­i­cant influ­ence and con­trol may be exer­cised by a shad­ow direc­tor of a com­pa­ny, for exam­ple, or by a com­pa­ny founder whose rec­om­men­da­tions are gen­er­al­ly fol­lowed by share­hold­ers. While not new for UK com­pa­nies, the ques­tion of whether any indi­vid­u­als exer­cise sig­nif­i­cant influ­ence or con­trol over an enti­ty’s oper­a­tions will require care­ful assess­ment by over­seas enti­ties in their iden­ti­fi­ca­tion of ben­e­fi­cial own­ers under the Act.

One impor­tant amend­ment made to the Bill dur­ing its pas­sage through Parliament was to the dis­clo­sure require­ments where the reg­is­ter­able ben­e­fi­cial own­er of an enti­ty is a trust. In such cas­es, the name of the trust, date of cre­ation, and infor­ma­tion about the set­t­lor, ben­e­fi­cia­ries, and pro­tec­tors must all be dis­closed. The require­ments relate to each ben­e­fi­cia­ry and, sig­nif­i­cant­ly, any per­son who has been “at any time” a reg­is­tra­ble ben­e­fi­cial own­er of the over­seas enti­ty (irre­spec­tive of whether the terms of the trust have changed). There is a vari­ety of per­son­al infor­ma­tion that is exclud­ed from pub­lic inspec­tion, includ­ing infor­ma­tion about trusts (sub­ject to the pro­vi­sions in sec­tion 23), which will only be avail­able to the tax author­i­ties. This scheme starts to sig­nal what the gov­ern­ment hopes can be achieved fis­cal­ly by the ROE.

The ROE will apply to all future prop­er­ty pur­chas­es and ret­ro­spec­tive­ly to prop­er­ty bought since January 1999 in England and Wales and since December 2014 in Scotland. There will be a tran­si­tion­al peri­od of six months for over­seas enti­ties to reg­is­ter their ben­e­fi­cial own­ers with Companies House. In order to pre­vent the ben­e­fi­cial own­ers from avoid­ing dis­clo­sure dur­ing this peri­od, all dis­po­si­tions in this peri­od will still be required to pro­vide the ben­e­fi­cial infor­ma­tion required by sec­tion 4 (above).

There are a lim­it­ed num­ber of exemp­tions that may exempt an over­seas enti­ty from dis­clos­ing its ben­e­fi­cial own­ers, name­ly the inter­est of nation­al secu­ri­ty and the pur­pose of pre­vent­ing and detect­ing seri­ous crime. These exemp­tions were hot­ly debat­ed in Parliament and led to the removal of the dis­clo­sure exemp­tion where it was in the “eco­nom­ic well-being of the UK”. It is dif­fi­cult to see how any of these exemp­tions will apply to res­i­den­tial UK prop­er­ty ulti­mate­ly owned by pri­vate individuals.

The extent to which Part 1 of the Act will achieve one of its stat­ed pur­pos­es of reveal­ing the ben­e­fi­cial own­er of the prop­er­ty and there­by pre­vent­ing crim­i­nals from hid­ing behind secre­tive chains of shell com­pa­nies has been ques­tioned in the House fol­low­ing the cir­cu­la­tion of a brief­ing paper draft­ed by the Chartered Institute of Taxation.2 It was not­ed, that rather than ensur­ing that a prop­er­ty’s ulti­mate ben­e­fi­cia­ry is revealed, the Act requires that the ben­e­fi­cial own­er of the over­seas enti­ty that holds legal title to the prop­er­ty is iden­ti­fied. Therefore, where an over­seas nom­i­nee com­pa­ny, man­aged and ben­e­fi­cial­ly owned by a fidu­cia­ry ser­vices firm, holds (on behalf of oth­ers) the legal own­er­ship of prop­er­ty, the true ben­e­fi­cial own­er will not be reg­is­ter­able. This lacu­na in the new pro­vi­sions was debat­ed vig­or­ous­ly and may be addressed in the fol­low-up eco­nom­ic crime bill due to be intro­duced to Parliament in around ear­ly sum­mer 2022. If a gap is being exploit­ed, the Act allows for the appli­ca­tion require­ments to be mod­i­fied by sec­ondary leg­is­la­tion. Moreover, until fur­ther reforms are insti­gat­ed, which will require Companies House to ver­i­fy the iden­ti­ty of those indi­vid­u­als being added to reg­is­ter and give it pow­er to take enforce­ment action, crit­ics argue that these pro­vi­sions will not deter tru­ly cor­rupt actors from pro­vid­ing incor­rect infor­ma­tion to Companies House.

A range of offences have been cre­at­ed for offi­cers of an over­seas enti­ty that fail to adhere to the dis­clo­sure pro­vi­sions. For instance, where an enti­ty fails in its duty to update the ROE, the enti­ty and every default­ing offi­cer will be liable to a dai­ly default fine or a sen­tence of up to 5 years. It is also an offence for a per­son “with­out rea­son­able excuse” to make a “mis­lead­ing, false or decep­tive” state­ment. As well as being used by inves­ti­gat­ing enforce­ment author­i­ties, we antic­i­pate that the ROE will pro­vide use­ful infor­ma­tion for claimants con­duct­ing asset trac­ing in sup­port of legal claims. Therefore, man­agers of over­seas struc­tures should pre­pare them­selves for clos­er scruti­ny of their operations.

Part 2: Unexplained Wealth Orders Regime

Part 2 of the Act aims to strength­en the Unexplained Wealth Orders (“UWO”) regime, which has fall­en out of favour with UK enforce­ment author­i­ties since UWOs obtained by the NCA were dis­charged in 2020. To recap, UWOs and inter­im freez­ing orders were insert­ed in the Proceeds of Crime Act 2002 by the Criminal Finances Act 2017. UWOs are an inves­ti­ga­to­ry order requir­ing a respon­dent whose assets appear dis­pro­por­tion­ate to their income to explain the ori­gins of their wealth. The respon­dent must be a polit­i­cal­ly exposed per­son (“PEP”) or rea­son­ably sus­pect­ed of involve­ment in, or of being con­nect­ed to a per­son involved in, seri­ous crime, and the enforce­ment author­i­ty must demon­strate rea­son­able grounds to sus­pect that the known sources of a respon­den­t’s income would be insuf­fi­cient for them to obtain the prop­er­ty (the “income require­ment”). UWOs were intro­duced to assist enforce­ment author­i­ties to obtain infor­ma­tion about the own­er­ship of UK prop­er­ty, espe­cial­ly where the for­eign state refused to pro­vide sup­port to UK enforce­ment and assist with civ­il recov­ery of the prop­er­ty where the respon­dent did not pro­vide the infor­ma­tion required, and it could be shown, on the bal­ance of prob­a­bil­i­ties, that the prop­er­ty was obtained by unlaw­ful conduct.

The lim­i­ta­tions of the UWO regime in deal­ing with off­shore struc­tures became appar­ent in 2020 when the High Court dis­missed UWOs obtained by the NCA against Andrew Baker, a pro­fes­sion­al trustee, and var­i­ous off­shore enti­ties.3 The NCA had obtained three UWOs in respect of UK prop­er­ty owned by a num­ber of off­shore com­pa­nies and Panamanian Foundations of which Mr. Baker was the President, but which were ulti­mate­ly said to be bought by laun­dered mon­ey from the pro­ceeds of unlaw­ful con­duct com­mit­ted by Rakhat Aliyev, a Kazakh PEP. Notwithstanding the var­i­ous inves­tiga­tive errors made by the NCA, the case high­light­ed the short­com­ings of the regime to pen­e­trate com­plex over­seas struc­tures, not least because the income require­ment is an inapt test where the respon­dent to a UWO is an off­shore enti­ty “hold­ing” the prop­er­ty on trust for the ben­e­fi­cia­ry rather than the President (or man­ag­er or offi­cer) of the enti­ty, as with Mr. Baker.

The Act now inserts an addi­tion­al and alter­na­tive test to the income require­ment that enforce­ment author­i­ties can use to obtain an order, name­ly that they have rea­son­able grounds for sus­pect­ing that the prop­er­ty has been obtained through unlaw­ful con­duct. This amend­ment will pro­vide enforce­ment author­i­ties with more flex­i­bil­i­ty and make it eas­i­er to obtain an order. Importantly for those who admin­is­ter UK prop­er­ty through off­shore enti­ties, and to deal with the insur­mount­able issue that arose in Baker, the Act intro­duces a new cat­e­go­ry of indi­vid­u­als, termed “Responsible Officers” (typ­i­cal­ly direc­tors or man­agers), who can be respon­dents to an order where the respon­dent is not an indi­vid­ual. These indi­vid­u­als will be equal­ly sub­ject to an oblig­a­tion to pro­vide the infor­ma­tion sought by the author­i­ties where the respon­si­ble offi­cer is not the prop­er­ty hold­er. In addi­tion, fol­low­ing the very sig­nif­i­cant costs order that the NCA received in Baker, the unsuc­cess­ful enforce­ment author­i­ty will not be exposed to a cost order unless they have used the pow­ers unrea­son­ably, improp­er­ly, or dis­hon­est­ly. This should increase the NCA’s risk appetite and oper­a­tional con­fi­dence in apply­ing for UWOs.

Part 3: Sanctions reform

The final sub­stan­tive over­haul, pro­posed by Part 3 of the Act, is to tough­en up the UK sanc­tions regime and make it eas­i­er for the UK to move quick­ly to des­ig­nate indi­vid­u­als or enti­ties. While these pro­vi­sions are not as rel­e­vant to admin­is­tra­tors of off­shore struc­tures, they should be aware that:

  1. The sanc­tions des­ig­na­tion process in the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) has been stream­lined to allow the Office for Financial Sanctions Implementation (“OFSI”) to make urgent des­ig­na­tions of indi­vid­u­als and to pig­gy-back off des­ig­na­tions already made by oth­er gov­ern­ments. This means that the UK can mir­ror sanc­tions already imposed by the US, EU, Australia and Canada; and
  2. Their lia­bil­i­ty for mak­ing inno­cent mis­takes in deal­ing with a des­ig­nat­ed per­son or the funds and eco­nom­ic resources that are con­trolled by enti­ties con­nect­ed to them has increased. The Act now pro­vides for the impo­si­tion of civ­il fines on a strict lia­bil­i­ty basis, i.e., there is no require­ment to show that in breach­ing a pro­hi­bi­tion, the per­son knew, sus­pect­ed, or believed they were in breach.

Shortly after the Act received roy­al assent on 15 March, and as a direct con­se­quence of the mir­ror­ing des­ig­na­tion pow­ers in the Act, the for­eign sec­re­tary announced 370 new Russian and Belarussian sanc­tion des­ig­na­tions. While the new pro­vi­sions do not alter the pow­ers the enforce­ment author­i­ties have to for­feit or con­fis­cate frozen funds and prop­er­ty, again dis­ap­point­ing reform­ers, this may be an area that is addressed in the next eco­nom­ic crime bill.

Comment

  • The reforms pro­vid­ed by the Act intend­ed to reignite enforce­ment efforts against the flow of dirty mon­ey and the abuse of the UK prop­er­ty mar­ket by oli­garchs and klep­to­crats, will have a sig­nif­i­cant impact on fidu­cia­ries who man­age over­seas struc­tures. Nevertheless, as was repeat­ed­ly raised dur­ing the debate stages of the Bill, the ques­tion remains whether the NCA, OFSI, and the UK’s oth­er enforce­ment author­i­ties have the nec­es­sary resources to deliv­er on the Government’s robust agen­da. Critics of the Government’s agen­da have high­light­ed that enforce­ment author­i­ties have had access to a wide array of leg­isla­tive enforce­ment tools to tar­get and counter illic­it wealth for sev­er­al years, but resources to utilise such tools have dwin­dled con­sid­er­ably. The NCA’s own International Corruption Unit (the “ICU”), which is spe­cial­ly con­fig­ured to inves­ti­gate klep­to­crats, has had its bud­get slashed by 13.5 per­cent this year.4 Whether and how the pro­posed new NCA klep­toc­ra­cy cell will engage with the exist­ing enforce­ment author­i­ties (includ­ing the ICU) remains to be seen and prompts the ques­tion of whether adding anoth­er task force in an under­fund­ed land­scape will be effec­tive to “oper­a­tional­ize” (in the words of Priti Patel) the Act.
  • While flaws have been iden­ti­fied in the Act, par­tic­u­lar­ly in rela­tion to the robust­ness of the ROE scheme, the Government has assured the House that new leg­is­la­tion is being draft­ed to address these defi­cien­cies, includ­ing a com­pre­hen­sive reform of Companies House. The Government’s most recent think­ing was out­lined in a February 2022 White Paper.5 The war in Ukraine is caus­ing unprece­dent­ed momen­tum for eco­nom­ic crime reform, and it may be that the fol­low-up eco­nom­ic crime bill, like­ly to be intro­duced to Parliament short­ly, will be one of the most rad­i­cal pieces of leg­is­la­tion aimed at klep­to­crat­ic regimes. As a result, these reforms are also like­ly to have sig­nif­i­cant impli­ca­tions for the con­tin­ued good gov­er­nance and man­age­ment of over­seas struc­tures dili­gent­ly run by fidu­cia­ries and trustees.

Footnotes

https://hansard.parliament.uk/Commons/2022–03-07/debates/97B249F2-C666-46EF-B46A-F2FF22DE2264/EconomicCrime(TransparencyAndEnforcement)Bill

2 6 March 2022 Briefing for Parliamentarians from the Chartered Institute of Taxation

National Crime Agency v Andrew J. Baker and Others [2020] EWHC 822 (Admin)

4 https://www.thetimes.co.uk/article/budget-cuts-leave-corruption-investigators-massively-outgunned-by-oligarchs-kmv5jlgdk

The February 2022 White Paper

Original source of arti­cle: www.mondaq.com/uk

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