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Economic Crime (Transparency and Enforcement) Act

The government has recognised that the lack of transparency about property ownership in the UK has made money laundering easier.

What does the Economic Crime (Transparency and Enforcement) Act do?

The government has recognised for several years that the lack of transparency about property ownership in the UK has made it easy for corrupt individuals to launder money through the UK. But promised reforms had been repeatedly delayed.

The war in Ukraine hugely increased the urgency of these measures in order to tackle illicit flows of Russian money through the UK and to strengthen the UK’s ability to enforce sanctions against individuals.[1] So the government decided to expedite some of the planned reforms, bringing forward this first piece of legislation in March 2022 ahead of a second economic crime bill planned for later in the year.

There were four main aspects to the Act.[2]

  • The first was to increase transparency of who owns property in Britain. The aim was to make it harder for foreign criminals to launder money through UK property markets by preventing them from hiding their identities behind shell companies.
  • The second aspect was the strengthening of authorities’ powers to confiscate unlawfully obtained wealth. The aim was to expand the scope of existing legislation and tackle some of the barriers that have in practice discouraged law enforcement agencies from pursuing cases.
  • The third was to make it easier to prosecute people for breaching sanctions.
  • The fourth was to make amendments to the Anti-Money Laundering Act 2018 to make it easier for the government to impose sanctions. This was not originally part of the bill was added as an amendment.

What was the timetable for passing the Act?

The bill had its first reading on 1 March 2022. The remaining Commons stages for passing the bill happened on 7 March and the bill was debated in the Lords on 9 March and 14 March. The Commons then considered the amendments made by the Lords on 14 March and it received royal assent the same day. It is very unusual for a bill to be rushed through so quickly.

Why had it taken so long to be introduced to parliament?

Concerns about the lack of transparency around property ownership in the UK and the way that this contributed to economic crime has been recognised by the government for several years,[3] with parliament’s Intelligence and Security Committee highlighting the UK’s openness to Russian investment, which offers “ideal mechanisms by which illicit finance could be recycled through what has been referred to as the London ‘laundromat’”.

A register of overseas entities was first proposed in a draft bill in 2018.[4] An initial consultation was launched in 2019,[5] followed by three follow-up consultations that closed in February 2021.[6] But the government did not publish its response to these consultations – or table any legislation to tackle economic crime – until 28 February 2022, after Russia had invaded Ukraine.[7] As recently as mid-January, the government rejected the idea of bringing an economic crime bill forward in the next parliamentary session.[8]

John Penrose, the government’s anti-corruption champion, said the bill has “been one of those unglamorous bits of economic and crime-fighting plumbing…There’s always been something that has been more urgent, including Brexit and the pandemic. But everyone gets the fact that this is important and right in principle.”[9]

But external experts have been more critical of the government’s failure to clamp down on money laundering. Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the defence think tank the Royal United Services Institute (RUSI), said on 28 February:

“The past week has dramatically revealed the significant role the UK plays in global money laundering and the vulnerabilities this dirty money creates for the UK. That it has taken a crisis such as the invasion of Ukraine to bring these issues – the product of decades of complicit neglect – to the government’s attention is a disgrace…Much-needed legislation has been consigned to the graveyard of ‘when parliamentary time allows’.”[10]

What exactly does the Economic Crime (Transparency and Enforcement) Act do?

Register of overseas entities

The Act establishes a new register of foreign owners of UK property, which will be held by Companies House. The register will cover all property bought in England and Wales since 1 January 1999, in Scotland since 8 December 2014, and in Northern Ireland from the date that this Act came into force. These dates were chosen because they are the earliest dates on which the land registrars in each country started to collect information about ownership by overseas entities for every registration.[11]

Anonymous foreign owners of property in the UK will be required to reveal their true identities, bringing the rules for foreign property owners in line with those for property owned by UK companies.[12] Property owning overseas entities will be required to reveal who their ‘beneficial owners’ are and this information will have to be verified by Companies House. A beneficial owner is defined as someone who owns more than 25% of the shares or voting rights, the right to appoint or remove directors or otherwise exert significant control over the company.

Overseas entities will be given six months from the date the Act comes into force to register their beneficial owners. Failure to do so – or providing false information – will be punishable by a fine or up to two years in prison.

Entities must update their records every year and will be fined up to £2,500 per day that they are in contravention.

Entities that fail to reveal their beneficial owner will be prevented from selling the property. If an entity did sell a property under these circumstances, it would be liable to a fine and/or up to five years in prison for the company’s officers.

Unexplained wealth orders

The Act also strengthens the UK’s existing regime of unexplained wealth orders (UWO). UWOs are used against politically exposed people or those suspected of being connected to serious crime and whose assets seem disproportionate to their income, allowing law enforcement agencies to demand an explanation for how assets worth more than £50,000 were paid for. A UWO is not a power to recover assets. But any response from a UWO can be used in subsequent civil recovery proceedings.

The Act expands the scope of UWOs by ensuring that property held via complex ownership structures or trusts can be included.

UWOs have been in operation since January 2018 but only nine have so far been granted, in relation to four separate cases.[13] The new reforms seek to remove some of the barriers that have stood in the way of more extensive use of UWOs. First, the Act increases the time available to law enforcement agencies to review any material provided in response to a UWO. Second, the Act seeks to protect law enforcement agencies from risking substantial legal costs in the event of an unsuccessful application for a UWO by reforming cost rules. Under the new rules, law enforcement agencies would not be required to meet respondents costs as long as the law enforcement agencies can demonstrate they behaved reasonably and honestly.

Enforcement of sanctions

The Act also introduces new measures to make it easier to sanction people for breaching sanctions. Until now, in order to impose a monetary penalty, authorities have had to demonstrate not only that the person has breached the sanctions but also that they knew – or had a ‘reasonable cause to suspect’ – that sanctions were being breached. This latter condition is to be removed.

This is intended to make it easier for the Office for Financial Sanctions Implementation (OFSI) to impose significant fines. The office will also be able to name publicly organisations that have breached financial sanctions, even if they have not received a fine.

Changing regulations for imposing sanctions

The Act makes it easier for ministers to impose sanctions on individuals, including to make it easier to impose sanctions on people who have already been sanctioned by Australia, Canada, the EU or the US. The government made use of these provisions for the first time on Tuesday 15 March.[14]

Does the Economic Crime (Transparency and Enforcement) Act go far enough?

Several concerns raised about the original draft bill were addressed through amendments – including reducing the amount of time that overseas entities had to provide details of beneficial ownership (from 18 months to six months) and increasing the fines applicable for breaching the Act.

But some other concerns that were raised during the debates on the bill were not addressed.

Ability to claim a company has no beneficial owner

The Act risks leaving open the possibility that companies that hold UK property could continue to hide the true owner by claiming that they have no beneficial owner. This is already a common problem with the UK’s register of UK-owned companies.

Scottish National Party MPs have tabled two amendments to try to tackle this. The first extends the definition of beneficial ownership to cover those holding at least 10% of shares, rather than 25%. The second requires the registrar of companies to seek further information about any companies that claim to have no beneficial owners.

Loopholes remain

There are concerns that the legislation still allows individuals to hide their ownership of land through nominee agreements with professional services firms, such as a law firm or property management company. As drafted, the legislation requires that the beneficial owners of the company that holds the land be revealed. But this will not necessarily be the same as the person who ultimately benefits from the land if the company holding the land is simply a nominee firm appointed by the actual owner.[15] One way to mitigate this problem would be instead to take an approach similar to that adopted by the Scottish government. Under new regulations there, it will be necessary to report anyone who has influence or control over the land – not just the company.[16]

Transparency International has also raised concern about the 1,892 property titles that were last purchased by overseas companies before January 1999 and so would be exempt from having to declare their owners. They have called for all overseas companies that own UK property to be required to declare their beneficial ownership information.

Are they any other problems with the Economic Crime (Transparency and Enforcement) Act?

Companies House still needs overhauling

The effectiveness of the new register of overseas entities relies on Companies House having the ability to verify the information provided and hold companies to account for providing false information. But there have long been concerns about the quality of information held by Companies House. Critics have noted that without strengthening the organisation – expanding its powers of inquiry and resources to investigate and remove false information, and requiring mandatory identity checks on those incorporating companies, on company directors and on those who ultimately control companies – the new register could have little impact.

The government has been promising to strengthen the organisation for a long time. A consultation was launched in May 2019, promising robust new rules.[17] But nothing has been done since to implement them. The government has now published a white paper on its plans to upgrade Companies House, which they intend to legislate for in a second economic crime bill later this year.[18]

Transparency International said, “We strongly recommend that the Government bring forward promised legislation at the earliest opportunity to empower Companies House with the powers to introduce verification checks and to query, investigate and remove false information.”

Lack of resource for enforcement

Experts have also raised concerns that the provisions in the new Act will make little difference unless authorities are provided with additional resource to enforce them, noting that the UK already has strong tools to target illicit funds but law enforcement agencies have struggled to make full use of them because of resourcing issues.

Susan Hawley, executive director of Spotlight on Corruption, a transparency campaign group, told the Financial Times that “Without addressing the serious issues that law enforcement face from shrinking budgets, decrepit IT systems, to continually losing staff to the private sector, the new legislation won’t make any difference at all.”[19]

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