LEGAL: Economic Crime Bill - targeted crackdown or blunt instrument? | Analysis

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Our ‘legal doctor’ Robert Botkai discusses the Economic Crime (Transparency and Enforcement) Bill 2022 and how it could affect you

FT - Robert Botkai partner Winckworth Sherwood

The lofty sounding Economic Crime (Transparency and Enforcement) Bill 2022 and the Register of Overseas Entities – is it a ‘targeted crackdown’ or a blunt instrument?

It all sounds a bit complicated but I am conscious that some petrol retailers may have structured their business in such a way that the new requirements

will impact on them.

Background

In light of the political pressures surrounding the conflict in Ukraine, the UK government has revived its proposed legislation establishing a ‘Register of Overseas Entities’ (the ‘Register’) as now contained in the Economic Crime (Transparency and Enforcement) Bill (the ‘Bill’).

Although the purpose of the Bill is stated to be to “target sanctions evasion and corrupt Russian assets hidden in the UK”, we are likely to see a far wider set of consequences for the majority of overseas entities engaged in UK-centred transactions and not just in the real-estate sector.

Key Takeaways

The Bill is intended to provide disclosure of the ultimate beneficial ownership (‘UBO’) of any UK-based real-estate assets. As such, the key takeaways from the Bill are that:

1) Despite the headlines, the Bill and the Register itself are not targeted against Russian individuals or companies.

2) Instead, the Register is intended to be a register of all overseas entities and their UBOs holding UK real estate akin to the current Persons with Significant Control Register.

3) There will be a significant impact on all overseas entities’ ability to deal with land in the UK with a need to declare their beneficial ownership before being able to do so.

4) There will be an 18-month grace period from when the Bill is passed for overseas entities to register.

Your name will also go on the list

The Register provides that all overseas entities that hold or intend to hold an interest in land in the UK must:

a) Identify their UBOs (in effect any person who holds more than 25% of voting rights or other control in the overseas entity, directly or indirectly); and

b) Register them at the Register.

Basic information about the UBO and overseas entity will be publicly available.

There will be a duty to update the Register on an annual basis and failure to do so could result in criminal sanctions with officers of the overseas entity personally liable.

The Impact

This Bill, when enacted, would capture many of the overseas corporate entities currently used in land investment. Moreover, there will be an ongoing impact for most overseas entities who currently own land in the UK, as the requirement to register relates to all land acquired on or since January 1, 1999.

This will mean that after the grace period, overseas entities will not be able to dispose or otherwise deal with their UK land until they receive their overseas entity ID.

The UK government has stated that it expects an “immediate chilling effect” due to the publication of the draft Bill. However, it is hard to envisage this.

Instead the Register is likely to add to the administrative burden of dealing with land transactions in the UK, not in the least during the initial period where overseas entities are all seeking their ‘overseas identity IDs’. It will likely also cause delays and further compliance requirements in routine transactions, eg in the course of letting premises.

Due diligence on an overseas entity’s compliance with the Register will form part of future transactions, including on refinance with lenders.

Practically, it may also lead to changes in investment in UK real estate by overseas entities to the extent that they withdraw from buying or holding UK land if they do not wish to engage with the new regime.

Alternatively, the Bill may prompt a desire to change the existing ownership structures of overseas entities to avoid or mitigate the impact of these disclosure requirements.