On 15th March 2022, the Economic Crime (Transparency and Enforcement) Act (the ECTEA) came into force in the UK for the Registration for Overseas Entities. The idea for this Act was proposed as early as in 2016, but only following the Russian invasion of Ukraine in February 2022, was the bill for this Act passed through under an accelerated procedure.
The ECTEA introduces a system for the registration of overseas entities which requires all overseas entities that own or transfer land or property in the UK to register before 31st January 2023 at the Register of Overseas Entities (ROE), set up by Companies House on 1st August 2022. If an overseas entity fails to comply with such registration requirements, the overseas entity will no longer be able to buy, sell or otherwise dispose of its interest in land or property.
Our international trade specialist Eric Jiang shares more information below on who needs to register, what information needs to be shared and how overseas entities should respond.
1. Which overseas entities must register?
In accordance with the ECTEA, any overseas entity that owns a freehold estate in land or a leasehold estate in land, granted for a term of more than seven years, must register between 1st August 2022 and 31st January 2023, failing which they will not be able to buy, sell, transfer, charge, or otherwise dispose of their interest in property.
Such overseas entities must also update their registrations annually.
All information registered must be truthful and consistent. Any overseas entity that fails to comply with any of the above requirements could face a daily fine of GBP2,500 or imprisonment (for their managing officers) up to five years. In addition, from 5th September 2022 onwards, no overseas entities will be able to register their land or property in the UK without prior registrations at the ROE.
It is worth noting that the ROE registration requirements apply not only to overseas entities which acquire or transfer property after the ECTEA takes effect, but also retrospectively to all overseas entities which own land or property purchased:
a) in England and Wales on or after 1st January 1999;
b) in Scotland on or after 8th December 2014; and
c) in Northern Ireland on or after 1st August 2022.
Moreover, those overseas entities which disposed of their land or property in the UK on or after 28th February 2022 must also register and report the details of their disposals.
An overseas entity is defined as a legal entity that is governed by the law of a country or territory outside the UK, which could be a body corporate, partnership, trust or other entity. It does not include an individual or natural person.
2. What information must overseas entities register?
The overseas entities need to register all the general information about themselves. The core information the ECTEA requires the overseas entities to register, or disclose, are the names of their Registrable Beneficial Owners or Managing Officers.
A Registrable Beneficial Owner refers to an individual, government or public authority, or other legal entity which a) holds, directly or indirectly, more than 25% of shares or b) voting rights in the overseas entity, or c) the right to appoint or remove a majority of the board of directors of the overseas entity, or d) which has the right to exercise or actually exercises significant influence or control over the overseas entity, or e) which is a trustee of a trust, member of a partnership, unincorporated association or other entity with the abovesaid right or influence or control, or f) which has the right to exercise or actually exercises significant influence or control over the activities of the trust or entity.
A person with significant influence or control is called a PSC and defined similarly in multiple UK legislations. If there are no Registrable Beneficial Owners to register for the overseas entity, the Managing Officers, such as the directors, managers or company secretary, shall be registered.
Where certain conditions are met, some Registrable Beneficial Owners may be exempted from registration. Nevertheless, criminal investigation may follow if a Registrable Beneficial Owner that should have been registered and should not have been exempted is found to have failed to register.
3. Information to register must be verified by regulated professionals
If the ECTEA only requires that the overseas entities involved disclose and register their beneficial owners, it might be a lesser burden on the overseas entities. The ECTEA, however, requires that the information to disclose and register be verified by certain UK regulated institutions or professionals before such information may be registered. The verification requirement is further extended to the registration of change of information, annual updating of information and removal of any information. A verification statement signed by a regulated institution or professional must be provided when disclosing and registering any such information.
Pursuant to the ECTEA, the Department for Business, Energy & Industrial Strategy made the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 in June 2022, and further issued a technical guidance for registration and verification, which is called the Guidance for the Registration of Overseas Entities on the UK Register of Overseas Entities, in August 2022, and set out many details for the ROE registrations. By those provisions, only certain UK regulated institutions or professionals, such as credit institutions, financial institutions, independent legal professionals, auditors, tax advisers and estate agents, may verify the information for such registrations and provide verification statements. As such, a due diligence process by such institutions or professionals would appear to be unavoidable for the ROE registrations.
4. Potential impacts of the ROE registration requirements
The ROE registration requirements were initially proposed on the basis that they are necessary for combatting foreign criminals in laundering monies through investments in UK land and property. When the ECTEA was accelerated for passing in the wake of the Russian invasion of Ukraine, the UK government further claimed that the ROE registration is important to the Office of Foreign Sanctions Implementation (OFSI), part of HM Treasury, in its enforcement of sanctions against sanctioned Russian individuals and legal entities.
Certainly it may be right to say that some foreign criminals are laundering monies and some Russian tycoons are secretly investing in UK land or property; but it may be overstating it to say that the UK property market is full of such activities. Most likely, the overseas entities required for the ROE registrations are not criminals or tycoons, but rather ordinary foreign investors.
As such, the ROE registration requirements can be said to have the following adverse impacts on ordinary foreign investors:
- Additional costs: the ROE registration requires initial registration, registration of change of information, and annual updating as well as verification by UK regulated institutions or professionals. This will definitely incur material costs on the relevant overseas entities and increase their costs of owning or transferring land or property in the UK;
- Loss of advantage in private investment: one of the main advantages against publicly traded companies for privately held companies is that they can attract investors in private and maintain privacy for such investors (not for terrorism, tax evasion or any other illegal purpose). The ROE registration, however, forces such privately held companies to disclose their direct and indirect beneficial owners, even their trustees, which would virtually nullify the private nature of such companies and put them in a difficult position;
- Shifting of responsibilities: Investigating and tracing illegal or sanctionable assets are the responsibilities of criminal investigation agencies, the OFSI and other government authorities. Forcing the overseas entities to register and disclose is tantamount to shifting such responsibilities from such government authorities to such overseas entities, and at the latter’s cost;
- Adverse impact on international investments and international operations: The ROE registration is setting up a new example in the world, and if followed by other main destinations for international investments and international operations, would unduly burden and possibly chill such activities.
5. How should overseas entities respond?
Despite the above critique, it would be foolish for the relevant overseas entities not to prepare for full compliance with the ROE registration requirements. Indeed, we would suggest that the relevant overseas entities take certain actions immediately, as follows:
- Investigate internally and find out if the group or any legal entity in the group owns any real property in the UK, including any lease for more than seven years;
- Investigate internally and confirm the shareholding/ownership structure of the group, and trace up to all ultimate beneficial owners (not just ultimate controlling person(s));
- Retain qualified legal professionals to ascertain all Registrable Beneficial Owners, Managing Officers and PSCs and check their risks in sanctions and other compliances;
- Retain UK regulated institutions or professionals directly or through their working partners in a relevant jurisdiction, and prepare all necessary information for verification and registration;
- Complete initial ROE registration before 31 January 2023 and annual updating thereafter, with registrations of change of information in between and as needed.
In Summary
Assistance with Registration for Overseas Entities
Prospect Law has been accepted as an agency by Companies House to assist clients with the registration of overseas entities. If you think your organisation needs to register and would like to talk through the process with our approved team, please contact us immediately to arrange a preliminary call.
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