Register of Overseas Entities

As part of the Government’s desire to improve transparency and stop foreign criminals using UK property to launder money, anonymous foreign owners of UK properties are now required to reveal their identities. The Register of Overseas Entities (ROE) (as implemented by The Economic Crime (Transparency and Enforcement) Act 2022 (the ECTEA) came into force on 1st August 2022. It is intended that the register will:

provide more information for law enforcement;
improve transparency; and
bring the ownership of property by foreign entities in line with UK companies who are required to disclose their beneficial ownership to Companies House.

Application and scope

The new measures apply to foreign owners of UK property including:

overseas entities (a company or other similar entity governed by the law of a country or territory outside the UK); and
beneficial owners of such entities (those with significant influence or control)

They apply retrospectively to freehold property or the grant of a lease for more than 7 years (from the date of the grant), in either case pursuant to an application made on or after 1^st January 1999[1] (a “qualifying estate”). Overseas entities wishing to acquire a qualifying estate are also within scope.

Those who already hold qualifying estates will have six months from 1^st August 2022 to register; failure to do so will be a criminal offence.

Legal professionals with clients who are acting in property transactions involving overseas entities will be impacted as will those legal professionals asked by clients to verify an overseas entity (see verification below).

Non-compliance

Failure to comply with the new obligations may see the foreign company’s managing office facing criminal sanctions including a prison sentence of up to five years or fines of up to £500 per day.

Civil sanctions are also being introduced, such as financial penalties, as well as restrictions on selling or leasing the property.

Additional provisions, set out in Schedule 3 of the ECTEA, are due to come into force on 5th September 2022. They insert a new Schedule 4A into the Land Registration Act 2002 the effect of which is to prevent an application being made to register an overseas entity as the proprietor of a qualifying estate unless (at the time of the application) the entity is either a registered or exempt overseas entity. The provisions also require the registrar to enter restrictions on disposition in relevant cases.

Registration

Overseas entities are required to identify and register their beneficial owners with Companies House[2]. Once registered they will be provided with an ID registration number which will need to be included on the Land Registry application for registration of any relevant dealing. Where the overseas entity is disposing of its interest the registration number should be made available to the other side’s lawyer to enable them to register their client’s acquisition. It will therefore be necessary for lawyers on both sides to be up to speed with the new requirements. No one will want to be caught out at the point of registration with their priority period already counting down.

Verification

It is a requirement that information supplied to the register must be verified. This must be undertaken by a “relevant person” which includes independent legal professionals (as defined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (SI 2017/692) (the MLRs). The overseas entity must provide sufficient documentation to allow the relevant person to undertake verification. The verification procedure is set out in the The Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (the Regulations). Practitioners should note that verification under the Regulations is a very different process to conducting CDD under the MLRs and should exercise great caution in doing so. The risk-based approach favoured by the MLRs is not relevant here.

Relevant persons will need to be registered as an approved verifier first. Following registration the approved verifier will be issued with an assurance code which is used to complete the verification process. This additional step, whilst not onerous, will have timing implications. For law firms it will be the firm itself which is the relevant person, rather than the individual, although the registration form requires a named person to be included who has overall responsibility for identity checks. It is suggested that this is most likely to be the COLP (Compliance Officer for Legal Practice) or the MLCO (Money Laundering Compliance Officer). There is no requirement in the Regulations to designate a specific individual.

Verification is valid for 3 months, beginning on the day on which the information is verified. The relevant person may either verify the information on behalf of the overseas entity and deliver the application to the registrar themselves or they may verify the information only. In the former case they must deliver the requisite statement at the same time. If the latter applies the statement must be submitted within 14 days of the information being delivered to the registrar.

The statement is a statement to the registrar providing confirmation that the relevant person has undertaken the verification of the relevant information and that verification has complied with the requirements of the Regulations and the ECTEA. In addition it must include:

the date on which the verification was undertaken;
the names of the registrable beneficial owners, and as the case may be, the managing officers whose identity has been verified, but where it has not been possible to obtain full names, so much of that information as it has been possible to obtain;
the relevant person’s service address;
the relevant person’s email address;
the name of the relevant person’s supervisory authority;
where available, the relevant person’s registration number, or a copy of the certification details, given to the relevant person by their supervisory authority; and
the name of the individual with overall responsibility for identity checks, where that is different to the name of the relevant person.

Legal professionals choosing to verify but who are not compliant with requirements of the law, will leave themselves open to criminal prosecution and may be professionally negligent.

Ongoing obligations

Once registered the overseas entity will be obliged to update its information with Companies House annually. This continues until it applies to be removed from the live ROE. Renewals must be filed no later than fourteen days after the due date.

Risk Management

The most significant area of risk for the relevant person is the legal and factual analysis as to who is a registrable beneficial owner, registrable managing office or registrable trust and analysis of the nature of each of those persons’ control.

Establishing and understanding the nature of control will require an analysis of the laws in other jurisdictions and since the Regulations restrict the list of relevant persons to those who do business within the UK there may be many who are simply not competent to carry out the process. Those undertaking KYC due diligence on overseas corporate structures under the MLRs will know that the information available in other jurisdictions can be patchy. In some countries company registers consist only of the name of the company and confirmation that a certificate of good standing exists (which is of little assistance to practitioners). There is often no requirement to provide information about ownership on the register. This makes it difficult to easily comply with the requirement to verify information from an independent source. Information provided in another language also provides its own challenges and will need to be translated. Verification under the Regulations, which does not provide for a risk-based approach as the MLRs do, is more onerous.

The Law Society, in their detailed guidance, recommend that “a solicitor who intends to advise on the legal analyses above should be someone with a solid understanding of the ROE regime (for which an understanding of the PSC regime would also be helpful), trust law and overseas corporate forms. If a legal practice does not possess the relevant expertise to conduct analysis and to provide advice in respect of the ROE, they should decline to act”.

Relevant persons should ensure that they only verify from their own knowledge or information from a reliable and independent source. Whilst existing CDD may assist with some of the identification requirements for the individuals, an assessment should be made as to whether the information held is sufficient, is up to date, whether the information can legitimately be used (from a data protection perspective is it being used for a purpose different to that for which it was provided?), whether the relevant person is competent to advise and what type of reliable and independent information is available to them.

Other risk management points to consider include:

Deciding at management level whether your firm is prepared to agree to verify at all, on a case-by-case basis or for existing clients only. If they do, ensuring that internal procedures are in place and that caution is exercised is exercised at all times. Those concerned must understand the requirements of the legislation, the Regulations and any guidance (although it should be noted that Government guidance is non-statutory).
Ensuring that appropriate steps are built into your existing processes eg. making appropriate enquiries at the outset of the transaction, particularly if acting on behalf of a buyer from an overseas entity, that they are registered and have the ID registration number;
Making sure client care letters set out the respective responsibilities of the legal advisor and the client in relation to the submission and verification of a ROE application; and ensure that the letter clearly sets out whether the work includes the initial application or the annual updating of the register. It would be prudent to consider including a requirement that responsibility for registration, updating of the register and annual renewal is that of the client unless otherwise agreed.
Consideration of whether the relevant person has a major role in the underlying transaction and is therefore best placed to undertake verification;
Checking with your professional indemnity insurer that the verification service is covered under their policy.

Readers should note that a second Economic Crime Bill is due later this year.

[1] in England and Wales

[2] Note that the definition of beneficial owner under ECTEA (Schedule 2) is not the same as the definition of ultimate beneficial owner in the MLRs.