Breaking ‘Londongrad’? The Economic Crime (Transparency and Enforcement) Act 2022

Context

During the night of 14 March 2022, Parliament passed into law the Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”). The Act’s long title is: “An Act to set up a register of overseas entities and their beneficial owners and require overseas entities who own land to register in certain circumstances; to make provision about unexplained wealth orders; and to make provision about sanctions.”

The Act is long overdue. For decades now, international development experts, academics, journalists and western governments have warned of the corrosive effect of business corruption upon national security and political stability.^[i] As anticipated by our February 2022 alert, the U.K. government was recently facing increased pressure to address its various long-running inadequacies.

In late February 2022, Putin’s regime in Russia launched its atrocity-laden war of aggression against Ukraine. Since then, British politicians of many stripes have been vocal in criticising British lawyers with Russian clients rather than accepting responsibility for U.K. government and policy failures in both legislation itself and the resourcing of law enforcement efforts against economic crime. Despite that backdrop, the Act is to be welcomed as it does help to address significant gaps in the law. However, as we have seen with previous legislative efforts against economic crime, the Act’s effectiveness in practice will turn upon the degree to which the government commits serious – and enduring – financial resource to the enforcement authorities. We turn now to describe the salient points of the Act.

Parts 1 and 2 of the Act are not yet in force as they require regulations by the Home Secretary. However, Chapter 3 of Part 2 of the Act (imposition of sanctions) is in force as of 15 March 2022.

Summary of Key Provisions

Part 1: Establishing a Register of Overseas Owners of U.K. Property

The Act requires all non-U.K. entities that own or buy real property^[ii] in the U.K. to join a public register listing the entity’s beneficial owner(s). Each such entity will, once it joins the register, become a “registered overseas entity.” The requirement aims to prevent criminals hiding their property ownership behind chains of obscure shell companies.

A person will be a beneficial owner of an entity if they (i) hold more than 25% of the shares or voting rights in that entity; (ii) have the right to appoint or remove the majority of the directors of that entity; or (iii) have the right to exercise or actually do exercise significant influence or control over that entity. 

Companies House will begin work to implement the register as quickly as possible, working with the U.K.’s three land registries. The rules will apply retrospectively to property bought up to 20 years ago in England and Wales, and since December 2014 in Scotland. Property owners will have six months to comply with the new rules.

Non-U.K. entities that already own property in the U.K. will have six months from the date of the Act’s commencement to either apply for registration or dispose of their property. This is a significant reduction from the original proposed grace period of 18 months. Some will argue that six months is itself too long a timeframe.

Other points to note include:

• any foreign company selling properties between 28 February 2022 and the full implementation of the register must also submit their details at the point of sale;
• failure to comply with the Act’s registration obligations will constitute a criminal offence for both the entity and, importantly, each officer of that entity. The offence will be punishable by a daily fine (not exceeding £2,500), imprisonment of up to five years, or both; and
• the Secretary of State may exempt a person from registration if she considers that it is necessary to do so “in the interests of the economic wellbeing of the United Kingdom.” That is, essentially, a national security consideration.

Part 2: Strengthening Unexplained Wealth Orders

The Act also makes wide-ranging amendments to the framework that governs Unexplained Wealth Orders (UWOs). These reforms include:

• making it possible for certain “responsible officers” of a company to receive a UWO even if it is the entity that owns the property and not the directors themselves;
• establishing a lower test for the grant of a UWO. Instead of the court being satisfied that the known sources of lawful income would be insufficient to obtain the property, it will now be sufficient if the court is satisfied that there are reasonable grounds for suspecting that the property has been obtained through unlawful conduct;
• giving enforcement authorities the ability to apply for an interim freezing order alongside an application for a UWO; and
• limiting an enforcement authority’s liability for costs in proceedings about UWOs or interim freezing orders (unless acting unreasonably).

Significantly, the Act will bring individuals who own property in the U.K. through trusts and shell companies within the scope of the UWO rules.

The government has also committed to publishing an annual report on the use of UWOs, which we believe practitioners and civil advocacy groups, who have criticised the very limited number of UWO cases to date, will review with keen interest.

Part 3: Strengthening the Civil Financial Sanctions Regime

Under Chapter 3 of Part 2 of the Act, individuals and companies that breach a financial sanctions prohibition or fail to comply with an obligation will become subject to civil monetary penalties imposed by the Office of Financial Sanctions Implementation (OFSI) on a strict liability basis.

Even where no monetary fine is imposed, OFSI will be empowered to publicly identify companies and individuals that it suspects, on the balance of probabilities, have breached financial sanctions rules.

The Act amends the existing law in respect of sanctions by:

• removing the requirement that to receive a fine for sanctions breaches, a person must have known or suspected they were breaching sanctions law;
• no longer requiring personal review by the appointed government minister for sanctions penalties;
• providing for the publication of notices by the Treasury stating that it considers that a person has breached sanctions law even if no fine has been imposed; and
• increasing the scope of information-sharing powers as they relate to sanctions.

Although the catalyst for expediting the Act was Putin’s war against Ukraine, it is important to note that its provisions do not just affect persons connected with Russia. Instead the Act, if used appropriately by suitably-resourced enforcement authorities, could well have a wider and enduring impact on the long-running London Laundromat.

Click to view the full alert.

*Special thanks to Francisca Cassidy-Taylor for her assistance with this alert.

[i] For example, see: Misha Glenny, McMafia (2008); Transparency International, Corruption as a Threat to Stability and Peace (2014); Oliver Bullough, Moneyland (2018); Tom Burgis, Kleptopia, (2020); and The Royal Institute of International Affairs, The UK’s Kleptocracy Problem (2021). Furthermore, note the UK Parliamentary inquiry on illicit and emerging finance, launched on 1 February 2022.

[ii] Defined in the Act as as freehold interest, or a leasehold interest granted for more than seven years.