UK continues its crack-down on the use of UK real estate to facilitate money laundering

Over the last year and a half or so we have been commenting on the Government’s effort to make the UK a world leader in corporate transparency, following the progress of the Draft Registration of Overseas Entities Bill (the “Bill“) published by the Department for Business, Energy and Industrial Strategy (“BEIS”). Here’s what we previously said:

• “Goodbye to opaque offshore structures holding UK real estate”
• “Loopholes in draft anti-money laundering legislation ask Government to think again”
• “UK Government wants to know if UK real estate is owned overseas”

The Bill’s principal objective is to establish a public register of beneficial owners of overseas entities that own or purchase UK property.  The register will be maintained at Companies House.

In May 2019, a Joint Committee of peers and MPs published a report which set out its key concerns about the Bill (the “Report”).

The Government released its response to the Report (the “Response”) on 18 July 2019, and we look below at the key parts of that response.

Definitions of “overseas entity” and “legal entity”

The Report highlighted that entities which do not fit the description of legal entity as set out in the Bill will not be bound by its requirements. As a result, the Report recommended making the definition sufficiently wide and flexible to encompass the broad range of overseas entities which own UK property.

In the Response, the Government stated that the definitions of “overseas entities” and “legal entity” are sufficiently wide, clear and flexible.

The Response says that guidance will be published by the Government in order to provide sufficient clarity to overseas entities, third parties transacting with overseas entities and facilitators to understand the requirements of the Bill.

In the Response, the Government also highlights that it does not believe it is appropriate for a UK  agency such as one of the land registries or Companies House to make decisions on the legal personality of a foreign entity. The Government does not feel that a pre-clearance mechanism will be necessary as a result.

That must be a sensible decision, given the existing workload of those registries and the practicalities of gearing up to be able to de facto opine on whether or not a definition applied in relation to a specific set of circumstances.  What that means however is that further reliance will be placed on advisors at the ‘know your client’ stage to advise on whether an entity is registrable or not – that said, the wording is sufficiently wide in scope that cases where an entity is not registrable will be the exception rather than the norm we would assume.

Trusts

Trusts, not having a separate legal personality, will not be obliged to register under the Bill. Nevertheless, the Government feels that “the risk of criminals exploiting UK trusts to launder money is… assessed to be low”.

Where a trust incorporates an entity to then buy UK real estate, that entity will need to be on the register at Companies House.  In that scenario, the Government would expect to see in the register the name of the entity and the names of the trustees or any other person that exerts significant influence and control over the entity that is being registered.

The Response further notes that the UK has elsewhere taken action to ensure that information about UK trusts is collected and made available to law enforcement (via the Trust Registration Service).

Thresholds and “Significant Influence or Control”

The 25 per cent beneficial ownership threshold contained in the Bill follows the principles of the persons with significant control (“PSC”) regime. It is also in line with current global norms as regards beneficial ownership. The Response states that the Government will keep the thresholds under review.

As is the case for the PSC regime, the Bill does require individuals, who hold less than 25% of the shares or voting rights in an overseas entity but have significant influence or control over the entity, to be registered as a beneficial owner under the Bill.

The Financial Action Task Force (“FATF”), which sets global anti money laundering and counter terrorist financing standards, does not mandate a threshold for determining beneficial ownership. However, the FATF has found a 25 per cent threshold to be acceptable as an example of how to determine beneficial ownership.

A recent review of the UK’s anti money laundering regime by the FATF has determined that the UK has the strongest regime in place of all 60 countries assessed to date.

Exceptions where entity is already registered in another jurisdiction

Comment is made in the Response that regulations may be made to exempt entities from registering where they have already been registered in an equivalent way in another jurisdiction.  Since the UK’s register will be the first of its kind, such exemptions are unlikely to be relevant for a while or at least until other jurisdictions start following the UK’s lead.

Progress of the Bill

The Response shows that the Government listened to the concerns raised by the Joint Committee in the Report, although it clearly didn’t agree with many of them. The Response has brought the Bill closer to being adopted as UK law.

The next step in the legislative procedure is for the House of Commons to debate the content of the Bill and then vote on its approval.

According to the Report, the expected introduction of the Bill would be after July 2019 and the Bill itself should receive Royal Assent in mid-2020, with the register itself coming online in perhaps 2021.

Other points flagged in the Response

The Response also highlights the following points made by the Government:

• Listing the type of entities on the face of the Bill which may be eligible for exemptions could limit the ability to respond to changing circumstances (such as whether the listed entity should no longer be exempt).
• The register maintained by Companies House should include a mechanism which allows users to flag suspicious or potentially incorrect information. The Government will also consider further methods which will ensure that the information set out in the register is as accurate as possible.
• Accepted the Joint Committee’s recommendation as regards the role of professional services providers in checking the viability of the information submitted to the register. The Government will explore the viability of this option.
• Consider the idea of also including civil penalties in addition to the use of criminal sanctions as an alternative means of regulating behaviour.

Any questions?

If you would like to discuss the implications of the Bill for your business, then do please contact us at enquiries@humphreys.law.

This piece was researched and prepared by Amir Kursun, with input from the wider Transactional team. 

Humphreys Law