The Economic Crime (Transparency and Enforcement) Act 2022 was recently introduced, and subsequent delegated legislation and changes at Companies House are likely to combine to have significant implications for law firms over the next few months. The Law Society of England & Wales issued a note 16 March 2022, with a further note 21 July.
This legislation will create a beneficial ownership register at Companies House for overseas entities holding UK property so that ultimate ownership and control will be clear. According to the Law Society, the Act “permits investigators to target people who manage properties within complicated offshore arrangements, even if they're not the actual beneficiary”, and allows the Office for Financial Sanctions Implementation to fine businesses for breaches where there is knowledge or reasonable cause to suspect breaches, as well as publicly name them even if no fine is imposed.
The Act is partly retrospective — requiring identification of beneficial owners by registration in relation to properties with overseas companies who bought in the last 20 years in England & Wales (eight years in Scotland). Failure to identify will lead to properties being frozen.
Solicitors are identified with other entities (accountants, banks, estate agents) as “supervised agents” (pursuant to the money laundering regulations) and can verify the prescribed information, in line with statutory requirements, and there are potential criminal sanctions for breaching the rules. Those who work at, or work on behalf of, the overseas entity may also complete the Register of Overseas Entities. However, government guidance highlights that it is “quicker and easier for an overseas entity to be registered by the same UK-regulated agent that carried out its verification checks”, which in many cases will be the entity’s legal professional.
This is a significant subject in itself, but we wanted to touch on what we see as risk implications for firms and provide some practical ideas to help manage how this affects clients:
All areas: Identify live and recently completed transactions involving overseas companies that may hold property, and establish whether beneficial ownership is already clear. If not, establish whether the firm has received and can verify information. If not, outline how compliance could be achieved, and if the firm either is going to do that or is obliged to do so given the retainer.
- Real estate departments:
- Consider writing to relevant clients with current and recently completed transactions, identifying the registration requirements and obligations. Identify whether you will undertake the process, what you will need to do, what you will charge — be clear that the fee will apply whether or not you are able to verify. Where purchasing from overseas companies, establish how compliance will be achieved and consider making compliance a contractual requirement.
- Underleases and sub-leases – are superior owners potentially caught by the legislation? If so, consider and advise what might be the effect of non-compliance in terms of obtaining licences to assign/alter, or serving notices.
- Audit past transactions for current clients to see if prior transactions are caught by the legislation. Consider writing to them explaining the impact and indicating whether or not you are happy to act and on what terms.
- Corporate/commercial department acquisitions, disposals and restructuring, and financing documentation involving overseas entities holding UK property may need review and consideration of amendments to reflect requirements and the impact if property is frozen.
- Contentious property departments and private client and tax departments are likely to need to conduct similar reviews. There may be tax implications to consider when ultimate beneficiaries are identified, and prior approaches by the firm or previous advisers may need to be revised.
- Dispute resolution where property and overseas ownership are involved, firms may need to warn clients. It would be embarrassing for non-compliance to be raised with a client in cross-examination unexpectedly.
- Immigration clients staying in premises with overseas ownership might need to be warned that non-compliance by the owner might be raised as an objection/tactical point.
This is a non-exhaustive list and the position is changing as guidance is issued; firms will need to keep up to date with changes. A Law Society Practice note on verification has been issued. In terms of insurance implications:
- Fines and penalties against the firm or individuals are excluded from many policies.
- If mistakes or delays occur which affect clients (for example, triggering a loss or penalty to them), negligence claims against the firm may follow. Refusal to verify beneficial owner information based on misunderstanding the requirements, or failure to advise clients of the need to register and/or the implications of delaying providing information, might well trigger losses for clients for which claims could be made that may or may not be justified. There is a good basis to argue such claims fall to the professional indemnity cover, subject to the overall terms and conditions (for instance, dishonesty).
- It seems reasonable to ensure that anyone providing verification services has either undertaken formal training or spent some time studying the Act and the practice notes and guidance as it appears. As with many areas of practice, it appears that creating a record of the processes undertaken leading up to verification will be a sensible step for each case, remembering that the process may vary in complexity depending on the scenario. Bear in mind that new legislation often creates new sources of claims against law firms. Firms may want to consider restricting who can verify, and/or requiring a four eyes check on verifications provided for clients while the process becomes more embedded and understood.
Stakeholders such as insurers, regulators, and banks are likely to request information in relation to relevant clients and activity. It would be wise to create procedures for identifying, assessing, and monitoring clients triggering these requirements so that prompt responses can be given.