Register of Overseas Entities; practices, pain points and how to address them

The Economic Crime (Transparency and Enforcement) Act 2022 is the first part of a set of legislation which will represent one of the biggest changes in corporate governance as regards Companies House since the 2006 Companies Act.  As such, you may think it would have been well drafted after clear consultation; but instead, it was rushed into law immediately following Russia’s invasion of Ukraine.

The stated purpose was as follows, in BEIS guidance:

‘The Register has been established to increase transparency in the ownership of overseas entities that own UK land. Organised crime has previously used the anonymity of opaque corporate structures to invest in UK land and remain largely invisible. Those who own and control such entities must now be identified. This will help to expose those engaging in criminal activity and allow the appropriate action to be taken, while making sure that legitimate businesses continue to see the UK as a great place in which to invest ... to prevent and combat the use of land in the UK for money laundering purposes and to increase transparency and public trust in overseas entities that own land in the UK’.

So ‘Those who own and control such entities must now be identified’

For years there have been clear issues over all sorts of suspiciously held properties - mansions, sweet shops on Oxford Street etc.

One other stated intention was ‘to mirror as far as possible the existing UK regime for people with significant control (PSC), subject to differences in enforcement, given that some of the PSC enforcement mechanisms cannot be applied to overseas entities’ – but that isn’t what it does; it’s very different, and it presages the next Economic Crime Act due in Spring 2023 which changes the role of Companies House from recorder of filed information, to gatekeeper and enforcer. That may not be before time, but the legislation catches mainly legitimate businesses, and those intent on concealing ownership will continue to do so. When the transitional period for registering ownership of land by non-UK entities closed, only 19510 out of 32,440 registered overseas organisations had disclosed their beneficial owners.

So an overseas entity is within the scope of the Register if it owns land in the UK and has done so:

a) in England and Wales, on or since 1 January 1999;

b) in Scotland, on or since 8 December 2014; and

c) in Northern Ireland, on or since 5 September 2022.

or it seeks to buy UK property in the future

There was a six-month transition period for registration which finished on 31 January 2023.

The first requirement is to identify beneficial owners, or ‘managing officers’, and verify their roles and identity. Beneficial owners are as follows: a person (‘X’), which may be an individual, legal entity, or a government or public authority, is a beneficial owner of an overseas entity (‘Y’) if they meet one or more of the following conditions.

Condition 1

X holds, directly or indirectly, more than 25% of the shares in Y.

Condition 2

X holds, directly or indirectly, more than 25% of the voting rights in Y;

Condition 3

X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y – note that there are two tests there – not just a direct right, but also an indirect one; so as with other elements of this legislation, there may be a need to trace rights up the chain of subsidiaries

Condition 4

X has the right to exercise, or actually exercises, significant influence or control over Y; these are four separate tests – the right to exercise; actual exercise, significant influence; or control. It is for the company to ‘come clean’ on this; failure to do so would be a criminal offence.

There are separate but similar provisions for trusts, which we are not covering here.

The entity must take reasonable steps to identify and disclose details and certain required information about all of its registrable beneficial owners (ss 12 and 13 - the entity has to give notice to the relevant people or entities). It should also be noted that a government or public authority will be a registrable beneficial owner in relation to an overseas entity in all cases where it is a beneficial owner of the entity (no exemptions from registration apply to governments or public authorities).

For a public company in particular, where there may well be a multitude of shareholders but none meeting the tests (or where it has beneficial owners but has been unable to fully identify them), the overseas entity must provide certain information in relation to its managing officers. What are ‘managing officers’? This isn’t a term generally used in English law, and it is described as ‘includes a director, manager or secretary of an overseas entity’. But what does this mean? Is it all directors; is it also, for instance, members of the Executive Committee? And these terms may be different in different jurisdictions.  And yet the onus is on the company, and those verifying identity, to decide, and potentially be fined if they guess wrong.

This information, when provided, will need to be updated annually and will be held in a public register from which anyone can obtain and inspect copies. The information not made public is the day of birth (i.e. month and year are shown) and home address if a service address is shown; that’s similar to what is displayed at Companies House.

The penalties can be severe, and we have no idea yet if they will come in gently at the lower end of the scale, or punitively at the upper end. Entities that fail to register or who knowingly or recklessly make a false statement in relation to any of the obligations related to the new register will face penalties. These include:

  • restrictions on the registration or disposition of title that would prevent the property being sold (by restrictions prohibiting the registration of a registerable disposition of the property unless the entity is a registered overseas entity or an exempt overseas entity), and
  • criminal sanctions for the entity each and every one of its officers, with daily fines of up to £2,500 and prison sentences of up to five years. This then becomes another instance where directors, regardless of their personal fault, can become criminally liable.

So – what must you do? If an overseas entity needs to include required information in relation to its managing officers in the application for registration, it should establish who are its managing officers and collect the required information; this then needs to be externally verified. Information about beneficial owners must be verified by an authorised agent, registered with Companies House. For these purposes this may include, among others, credit and financial institutions; auditors; insolvency practitioners, external accountants and tax advisers; Independent legal professionals note that in-house solicitors will not be able to conduct verification on behalf of the overseas entity that employs them). This list also contains trust or company service providers and, perhaps surprisingly, estate agents and letting agents.

You may think that some of these are more likely than others to have the knowledge of corporate structures to undertake the task. Lawyers, you would think, would be most appropriate in understanding corporate structures, but in many cases have been reluctant to take on the role. The Law Society have issued cautious advice, and the obligation not to verify (as well as penalties if you do, and shouldn’t have done it) mean lawyers may not wish to do this for valued clients.

Whichever way it goes – this legislation is a major nuisance for general counsel and governance professionals who will resist sharing, obtaining, certifying and distributing information on their board, and trouble those officers. Verification is an intrusive process – it must be carried out by the authorised agents on the basis of documents or information obtained from a reliable source which is independent of the person whose identity is being verified. However, there is no statutory definition of ‘reliable source’, although guidance suggests that documents issued or made available by an official body are to be regarded as being independent of a person even if they are provided or made available to the relevant person by or on behalf of that person. Hence, where some overseas registries themselves verify (in the way that Companies House doesn’t), it would seem that this can be relied on.

Otherwise, verification can be by obtaining or viewing original documents from a trusted and independent source (public or private) – difficult to do for overseas-based officers; on a risk-sensitive basis viewing copies of documents; guidance states that certification of a copy may give the verifier a higher level of confidence than an uncertified copy, but warns that verifiers are required to consider and document the risks of relying on certified copies for this). It may also be possible, if information is full enough, to conduct electronic verification, through a platform that is a reliable source (i.e., secure from fraud and misuse and capable of providing an appropriate level of assurance that the person claiming a particular identity is, in fact, the person with that identity, to a degree that is necessary for effectively managing and mitigating any risks of money laundering and terrorist financing); or obtaining information from other regulated persons.

Generally, verifiers may not adopt a risk-based approach. In the event of any uncertainty, the information should not be verified; and this is bound to cause conflict with the company. If there are matters that must be verified, but there is no information or document available that is both reliable and independent, the relevant person will not be able to verify that matter. This would be problematic for the overseas entity seeking registration and, unless reliable and independent documentation could be produced, would effectively freeze its in-scope UK real estate assets, preventing it from effecting dispositions.

We started by saying this is the first part of the new legislation; the second, the Economic Crime and Corporate Transparency Bill, for UK Companies, will provide inter alia:

  • Verification of identity for directors, beneficial owners including persons with significant control (PSCs), and those making a filing, such as corporate service providers.
  • Individuals will be prevented from acting as a director unless and until their identity has been verified, either by a regulated corporate service provider or the Registrar.
  • Beneficial owners that are corporations must verify the identity of one of their officers.
  • The maintenance of an ‘appropriate’ registered office and an email address for the receipt of documents, meaning that documents can properly be served there and will come to the company’s attention.
  • Failure to give an appropriate address will be a criminal offence by the company and every responsible officer.
  • The Secretary of State will be given new powers to impose criminal sanctions against authorised corporate service providers for failing to keep accurate records, which will be punishable by up to two years in prison or a fine.

The 2022 legislation is therefore just the start; there may be a longer delay in implementing this because it will require significant investment and infrastructure changes at Companies House, and we expect better fuller regulation and guidance, and clarification of the 2022 Act.

Paul Berwin, CEO, Berwins Solicitors

Paul founded Berwins in 1986 and has led the firm to become one of the leading law firms in North Yorkshire, before taking the bold step of leading the opening of its Berwins Digital Leeds office in 2013.

In 2022, Paul was described by Chambers and Partners as ‘a key participant in the Yorkshire tech sector.’ The legal directory then went on to say ‘The knowledge he has gained in his wider collaboration enables him to advise clients in a way that many other lawyers could not.’.

Read more on the Register of Overseas Entities in our Governance and Compliance article ‘Company secretarial expertise: Corporate transparency change coming to the UK’.

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