Economic Crime (Transparency and Enforcement) Act 2022 – Risky Business for Accountants?
07 September 2022
Guest article written by Sheona Wood, Lucy Tolond, Sean Murphy of DWF
The Economic Crime (Transparency and Enforcement) Act 2022, fast tracked by the Government in response to Russia's invasion of Ukraine to make locating assets owned by overseas companies more easily traceable, has potentially serious risk implications for Accountants.
On 15 March 2022 the Economic Crime (Transparency and Enforcement) Act 2022 ("the ECA") was introduced. It was fast tracked by the Government in response to Russia's invasion of Ukraine to make locating assets owned by overseas companies – including those acquired using illicit funds – more easily traceable. On 17th July 2022 the Government announced that a Register of Overseas Entities created under the ECA would be introduced on 1st August 2022.
The ECA is part of an overall strategy to change the role of the Registrar of Companies and the Land Registrar, and to make business and the ownership of assets in the UK more transparent. The ECA also imposes wider obligations in relation to existing sanctions and unexplained wealth orders. The ECA has potentially serious risk implications for professional advisers and for directors and officers (whether corporate or natural).
Who has to register?
An overseas entity is any legal entity that is governed by the laws of another country or territory. This includes the Channel Islands, Isle of Man and Republic of Ireland. The ECA requires all overseas entities that own or intend to purchase UK property to register with Companies House; to take reasonable steps to identify registerable beneficial owners; and to provide information to Companies House in relation to those owners. Any persons served with an information notice requesting information from them must respond within one month or face criminal sanctions.
A person will be registrable if they (or a trust or firm which they control):
- hold more than 25% of the shares or voting rights of the entity;
- have the right to appoint or remove a majority of the board of directors; or
- have significant influence or control over the overseas entity
There is a transition period of 6 months (until 31 January 2023) to allow this information to be registered. The ECA applies retrospectively to property bought by overseas owners in England and Wales after 1 January 1999, and after December 2014 in Scotland and applies from implementation in Northern Ireland.
If an overseas entity is unable to provide information on the beneficial owners they must provide information on their managing officers. The information submitted about the registered beneficial owners must be independently verified by a UK-based agent supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, which will include lawyers, accountants, tax advisers and financial institutions.
Ongoing obligations and Restrictions on the Property Register
The overseas entity must update the information on the Register annually. Failure to update the register is a criminal offence punishable by daily fines of up to £2,500.
The ECA will affect the transfer of freehold or leasehold land (granted for seven or more years) and will also affect new leases for terms of seven or more years and the granting of a charge as security over property. In broad terms, UK Land Registries will refuse to register certain property transactions (including sales and purchases and the grant of security over affected real estate) unless the relevant overseas entity is registered on the Register. Overseas entities and their officers may also commit a criminal offence if they attempt to dispose of affected real estate without being registered.
What are the liability implications for professionals?
Whilst it has been five years since the Government first announced its intention to create a public register detailing the beneficial ownership of overseas entities owning UK property, this radical change affecting both the obligations of company officers in relation to filings at Companies House and current and historic Real Estate transactions was introduced by the Government on just fourteen days' notice.
The six-month transition period for registration presents serious issues: the landscape for registration providers is sparse, and there are significant concerns around the risks associated with the verification process. Those challenges, in the context of a tight timescale for retrospective registration and coupled with the ongoing challenges of post-Covid working patterns, could cause a serious backlog in registrations.
New technical guidance on the registration and verification requirements for overseas companies was issued by Companies House and HM Land Registry on 1 August : Guidance for the Registration of Overseas Entities on the UK Register of Overseas Entities and Practice Guide 78:Overseas entities. The Law Society has also issued guidance to solicitors: Register of overseas entities: what solicitors should know about verification | The Law Society and the ICAEW has issued a guide to its members: https://www.icaew.com/technical/trust-and-ethics/economic-crime/guide-to-the-economic-crime-act-2022.
As with any change to legislation, professionals who fail to get to grips with the new rules could face claims from clients. It is important that professional advisers and officers of overseas entities are acutely aware of the need to register beneficial owners and plan appropriately. Officers and beneficial owners of overseas entities could face criminal sanctions and financial penalties for failure to register. Failure to do so could mean a client is unable to dispose of or deal with his or her own property and open them up to criminal and financial penalties.
The risks are particularly pertinent to solicitors: documents regarding registration of ownership are typically completed by solicitors, and many solicitors offer a corporate director or trustee service. Solicitors will potentially also be exposed to criminal and regulatory proceedings – any solicitor who breaks the rules will face up to five years in prison. Great care will have to be taken in relation to the independent verification of the information about registered beneficial owners and in relation to the corporate filings at Companies House.
If the rules are not properly followed, properties will effectively be 'frozen', with owners unable to sell or lease their property or grant security over it. Clients that suffer loss or damage as a result are likely to bring claims for negligence. There is also a risk of solicitors being overcautious, particularly given the potential criminal penalties for any solicitors who fail to comply. Solicitors who incorrectly refuse to verify beneficial owners could find themselves exposed to claims for loss of a chance or loss of a potential profit on a property transaction. The requirement to update the Register annually could also result in further claims if diaries are not properly managed or the scope of ongoing retainers is unclear.
Given that the ECA will have retrospective effect, firms will need to identify transactions which may be affected and establish what steps are needed to protect their clients' interests. There will be questions about the extent to which firms are obliged by the terms of their retainer to update and verify the information they hold, particularly for historic transactions. Firms will need to consider whether to write to relevant clients regarding the new requirements and obligations. Real estate teams in particular will need to consider the impact of the ECA on current and future transactions, and, when acting for purchasers buying property from overseas entities, will need to consider how best to achieve compliance; and the potential impact of the Act on leases and sub-leases. Private client and tax teams may also need to carry out 'audits' or reviews of historic transactions.
For M&A and real estate teams, specific drafting and due diligence where deals involve the acquisition or disposal of properties by overseas entities will need careful consideration, and deal documents may need updating to deal with the potential effects of the ECA. Overall, the ECA generates further transactional risk for deal parties and their lawyers, with buyers potentially locked out of the registration regime if a buyer is not compliant.
Solicitors negotiating on behalf of banks or other financial institutions could also find that securities are not valid if their counterparts have not complied with the necessary formalities; an incoming borrower will not be able to give a charge unless they are registered on the ECA register from 5 September onwards. Given the impact on security over property held by overseas entities, lenders will be reviewing their existing portfolios and taking steps to ensure borrowers are compliant – potentially resulting in claims against their professional advisers if they do not ensure compliance. The retrospective effect of the Act means that lenders will be examining their back book in addition to new transactions. Funders for overseas entities entering the UK maker will be particularly interested in registration status – borrowers need to be on the register before they can give security – which will slow transactions down.
Whilst the aims of the ECA - to try to increase transparency in the ownership of properties and companies is to be welcomed – the rules which create a new filing regime for Directors and Officers of Companies and affect current and historic property transactions have been introduced at short notice and have a tight window for compliance. Great care will need to be taken by professionals verifying identity, operating corporate filings at Companies House and acting in Real Estate transactions to ensure that the requirements of the ECA are complied with so as to avoid penalties and claims for breach of duty including negligence and potential criminal exposure.
Ensuring you are aware of The Economic Crime (Transparency and Enforcement) Act 2022 is of huge importance for your firm and your clients.
As highlighted by the ICAEW in its article on the matter, there is a clear risk of liability for accountants when processing verification checks under the Act, especially surrounding client due diligence which is more onerous than just complying with anti-money laundering regulations. This hurdle is a significant one under the Act due to the necessity to establish client company connections. That could be a particularly tricky area if, for example, you have any Russian clients, even if not resident in Russia, due to the scrutiny Russian foreign assets are attracting at present.
Howden recommend each firm should undertake a review of its risk management procedures in light of the Act’s requirements. As the ICAEW have noted: (assume this is an ICAEW quote)
“If a professional accountant undertakes verification and does not carry out the process correctly, then they open themselves up to criminal prosecution, regulatory sanctions, and liability for professional negligence”.
Our discussions with insurers indicate that they will expect this area to be covered in a firm’s proposal forms at renewal, especially if the firm agrees to undertake the verification checks. Insurers will want to see a firm’s risk management strategies to gain comfort the requirements are being adequately met. However Insurers will not advise firms on what they should be doing; they will expect each firm to make the appropriate arrangements so keeping appraised of any advice from the ICAEW on the matter is imperative.
Although there is risk involved in undertaking the verification process, there is also a risk in not advising clients of the requirements of the verification process. Either way, this is a matter which will affect all accountancy firms.
We highly recommend this article from the team at law firm DWF that discusses the relevant issues and risks from the perspective of professional engaged in this area of practice.
Kerry Bremner LLB, ACII, Divisional Director, Financial Lines at Howden
+44 (0)7525 816836