Economic Crime Act: what does it mean for law firms?

The government has introduced the Economic Crime (Transparency and Enforcement) Act 2022, which is aimed at strengthening the UK's fight against economic crime.

The new measures include:

• a beneficial ownership register for overseas entities holding UK real estate
• strengthening of unexplained wealth orders (UWOs)
• making it easier to prosecute anyone involved in sanctions-busting

The provisions

The register of overseas entities (ROE)

Money laundering is often hidden behind opaque and complex offshore corporate structures, making it harder to uncover illicit finance from abroad being laundered through the UK property market.

Discovering who owns property becomes more difficult if it’s registered to an overseas company whose ultimate beneficiaries are hidden from view.

Properties owned by nominee companies or multiple owners may be used as money laundering vehicles to disguise the true owner.

The ROE was introduced on 1 August 2022. It requires an overseas entity that owns or wishes to own property in the UK to identify its beneficial owner(s) and to register them with Companies House.

Information supplied to the register will be verified and the entity will need to update its information annually.

Explore our ROE guidance for solicitors undertaking verification responsibilities

Unexplained wealth orders

UWOs, created in 2017, were trumpeted by ministers as a powerful weapon but have had limited impact.

The reasons behind this are varied but – as acknowledged by government and the National Crime Agency (NCA) – using UWOs to pursue the richest and most powerful targets carries financial risks.

Critics of the government say the NCA has not got the financial clout or legal powers to make UWOs workable.

The Economic Crime Act now permits investigators to target people who manage properties within complicated offshore arrangements, even if they're not the actual beneficiary.

The NCA has also given more legal time to prepare cases for court.

But, most importantly, the NCA is now protected against crippling legal costs, providing it acts reasonably and properly.

Changes to UK sanctions

A key change to sanctions enforcement is the introduction of a "strict civil liability" test for monetary penalties.

In a significant shift from the previous regime, this will mean that businesses face liability even where they have no knowledge or reasonable cause to suspect that a transaction to which they are party is in breach of sanctions.

As a result, it's now far easier in practice for fines to be imposed.

These fines (which are limited at £1 million or 50% of the economic resources dealt with, whichever is greater) will be a civil liability.

It remains open to the Office for Financial Sanctions Implementation (OFSI) to prosecute businesses for breaches of financial sanctions where it can show there is knowledge or reasonable cause to suspect (which may result in fines or custodial sentences).

The act also allows OFSI to publicly name organisations that have breached financial sanctions even if no fine has been imposed on them.

Reform of Companies House

The government has also published a white paper setting out plans to reform Companies House, which will mean:

• anyone setting up, running, owning or controlling a company in the UK will need to verify their identity with Companies House
• Companies House will be given the power to challenge information that appears dubious, and will be empowered to inform security agencies of potential wrongdoing
• company agents from overseas will no longer be able to create companies in the UK on behalf of foreign criminals or secretive oligarchs
• the quality of information provided by companies to Companies House will be improved, so that the thousands of small companies who rely on it to make business decisions can trust who they are doing business with
• filing processes for small businesses will be streamlined and digitalised
• company directors will be better able to protect personal information published by Companies House which might put them at risk of fraud or other harm

Our view

We welcome the passing of the Economic Crime Act.

We've been supportive of the:

• principles and aims of the legislation
• government’s overarching ambition to improve the transparency of property ownership in the UK
• creation of a new register of overseas entities, which we have supported since it was first approved in 2017

As the act was passing through parliament, we highlighted ways to strengthen the legislation and address potential gaps with existing regimes.

We’re pleased to see that, following the introduction of amendments, many of these have now been taken forward.

The act now gives investigators a greater ability to shine a light on who the beneficial owner of a UK property is.

Further improvements

We understand that the act needed to be brought in quickly, given the recent events in Ukraine.

Further improvements should be possible through the implementation of the legislation and related workstreams.

These improvements include:

• completing the reform of Companies House, and
• resolving some of the tricky issues that remain in the people with significant control (PSC) regime

Both of these would enhance the transparency of ultimate ownership of UK companies.

What this means for solicitors

Under the provisions, when a solicitor typically registers ownership of land and property, they will have to declare in public records who ultimately benefits from it.

That means illicit finance being hidden in the UK property market – such as high-end property mansions, office blocks and luxury apartments – will become visible.

The register will apply retrospectively to property bought by overseas owners up to 20 years ago in England and Wales, and since December 2014 in Scotland.

The register will be held by Companies House, with support from the UK’s Land Registries.

If the solicitor registering the property fails to identify the beneficial owner, they will face restrictions over selling the property.

In effect, the property will be frozen, with the owner unable to lease it, sell it or raise a mortgage.

Any solicitor who breaks the rules could face up to five years in prison.

Timeline

15 March 2022 – the Economic Crime (Transparency and Enforcement) Act 2022 received royal assent

7 March 2022 – we briefed parliament on the act, setting out recommendations for ensuring the legislation works effectively and efficiently, and that all potential loopholes are closed – read our briefing (PDF 141 KB)