On 20 May the House of Commons and House of Lords Joint Committee on the draft Registration of Overseas Entities Bill published its pre-legislative scrutiny report.
Although it considers the Bill to be generally well drafted, the Committee believes that the Bill requires some improvements to achieve its aim of improving the transparency of overseas beneficial ownership. It is only if that aim is achieved that the proposed Register of Overseas Entities will be an effective tool against money laundering.
This update focuses on the report's key concerns and recommendations as they affect real property in England and Wales.
The UK's stable democracy, independent legal system and robust financial protections make the UK property market attractive to legitimate investors. Unfortunately they also make it attractive to money launderers who can use property to clean or hide illicit funds. Between 2004 and 2015 £180 million of UK property was subject to criminal investigation as suspected proceeds of corruption, but this is almost certainly just the tip of the iceberg.
Law enforcement agencies are often hampered by their inability to find out who ultimately owns or controls overseas entities used to conceal the proceeds of crime or corruption. The proposed register is designed to address this.
The draft Bill is part of a series of government initiatives to deal with money laundering. It is intended to complement the Persons of Significant Control (PSC) register which was introduced in 2016 and requires most UK entities to provide information about their ultimate owner and controllers to Companies House.
Main features of the draft Bill as it currently stands
- Overseas entities that already own UK property will have a grace period of 18 months to provide information for the register, identifying their beneficial owners
- A person will be a beneficial owner if they own more than 25% of the shares or control more than 25% of the voting rights, or if they have the right to exercise or do exercise "significant influence or control" over the entity
- The information on the register will need to be updated every 12 months
- Failing to provide the required information will be a criminal offence, as will providing false or misleading information
- An overseas entity which does not comply with the requirements will not be able to register its property at the Land Registry
- Where an overseas entity's title to property is registered, failure to comply will also affect its ability to sell, mortgage and grant a lease for a term of more than seven years. Compliance will be enforced by restrictions to be entered against the Land Registry title, and by criminal sanctions.
Main observations and recommendations of the Joint Committee report
Trusts loophole must be closed
The Bill does not cover trusts, which creates a loophole. This is a key concern and the government is asked to set out in detail how it intends to deal with the issue.
Government to consider reducing the 25% ownership and voting thresholds in the definition of beneficial owner
The government should give serious consideration to reducing the 25% ownership and voting thresholds in the definition of a registrable beneficial owner, as they may be too high to capture the true beneficial owners of overseas entities. Whatever threshold is chosen for the register should be mirrored by an equivalent change to the threshold under the PSC register to ensure coherence between the two regimes.
Guidance required on meaning of person having "significant influence or control"
The definition of a person having "significant influence or control" is critical to ensuring that beneficiaries who may not otherwise meet the proposed ownership or voting thresholds of beneficial ownership fall within the scope of the draft Bill. The Bill should therefore be amended to include a requirement for statutory guidance on this, which should as far as possible mirror the equivalent guidance on the meaning of "significant influence or control" in the context of the PSC regime.
Companies House must have sufficient resources to deal with urgent registration applications
Entities need to be able to register their beneficial ownership information quickly, as special purpose vehicles and property holding companies are sometimes only incorporated shortly before a transaction. Companies House needs to be given enough resources to deal with this, and to deal with the likely surge in demand resulting from overseas entities waiting until the end of the 18-month transition period to register.
Overseas entities should be required to update the register before any disposition is made
In addition to the annual update requirement, overseas entities should be required to update the register before any disposition is made. This will capture information at the point of the transaction, where any potential money laundering might occur. Any third party dealing with the overseas entity on a transaction would need to check this duty had been complied with, but the Committee believes this should not be too onerous a requirement in the context of the large quantity of information that routinely needs to be amassed on a legitimate transaction.
We have an observation to make on this proposal. Although it might not be too onerous for third parties to check the requirement had been complied with, a requirement to update the register before every disposition could be onerous for overseas entities. If "disposition" is to include the grant of a lease of seven years or more (as seems likely from the rest of the report), overseas entities which own multi-let investments such as shopping centres and business parks could find themselves having to update the register very frequently.
Verification checks to be strengthened
The current Bill has insufficient verification checks to deter criminals who want to submit false information, so this aspect needs to be strengthened if the Bill is not to fail in its central policy aim of providing a reliable and transparent record of the beneficial ownership information of overseas entities investing in UK property.
Enforcement - civil penalties in addition to criminal penalties
The Bill will not act as an effective deterrent unless it has "teeth". Criminal penalties may be difficult to enforce abroad, so civil penalties should be introduced, and could be backed up by criminal sanctions for non-payment. The government should also explore the possibility of enforcing civil penalties against land and other assets in the UK.
What will happen next?
The government has welcomed the Committee’s report and said it will publish a response in due course. Following Royal Assent and the making of secondary legislation, the government intends that the register will be operational in 2021 as originally proposed. Between now and then, however, the Bill has a long journey to complete and there will be many opportunities for change along the way. Judging by the tone and content of the Committee's report, those changes are likely to extend, rather than reduce, the obligations to be imposed on overseas entities.
Our earlier briefing on the draft Bill can be found here.