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The Public Sector and the Economic Crime (Transparency & Enforcement) Act 2022

30 August 2022

Public sector bodies need to be aware of the Economic Crime (Transparency and Enforcement) Act 2022 if there is any proposal to treat with an overseas entity.

The Government has now indicated that the critical 'transitional period' for The Economic Crime (Transparency and Enforcement) Act 2022 ('the Act'), which passed into law on 14 March 2022, will run from Monday 1 August 2022, for 6 months, and will expire on 31 January 2023. Companies House has also updated their blog to note that they intend to launch the Register of Overseas Entities on 1 August 2022.

Introduction

The new Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") creates a requirement for all overseas legal entities that own or wish to buy affected UK real estate to register with Companies House in the UK and provide information on their beneficial owners and/or managing officers.  Failure to comply with this new requirement is a criminal offence and will prevent the relevant overseas entity dealing with the affected real estate.  

Affected real estate

The new requirement only applies to overseas entities holding real estate in the UK and relates to most valuable freehold and leasehold interests across the UK's three jurisdictions (England & Wales, Scotland and Northern Ireland) and registered on one of the UK's Land Registers.

The Register

The register to be kept by Companies House is called the Register of Overseas Entities (the "Register").

Any overseas entity which owns or wishes to buy affected real estate must apply to Companies House to be registered.   Among other things, the application will need to provide details of the overseas entity's 'registerable beneficial owners'.  

There are specific and complex rules which determine whether someone is a registerable beneficial owner.  In very broad terms, a person will be registerable if, in relation to the overseas entity, they (or a trust or firm which they control) own more than 25% of the shares or voting rights, have the right to appoint or remove a majority of the board of directors or they have significant influence or control over the overseas entity.  In this respect the new requirement is similar to the existing requirement for UK companies to register their persons with significant control.  

Determining who the registerable beneficial owners are will, in some instances, be a difficult task particularly in relation to complex ownership structures.  The process is made even more challenging by requirements that the information submitted about the registered beneficial owners has to be in English and must be independently verified by a UK-based agent, that is supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (which would include UK accountants and lawyers).

Once registered, an overseas entity must update the information on the Register annually.

Timescales

Any overseas entities which already own affected real estate have six months from 1 August 2022 to register.  This obligation also applies to overseas entities who have disposed of affected real estate since 28 February 2022 and they are required to disclose such disposals as part of their registration.

Currently,  it appears that overseas entities wishing to acquire affected real estate after 5 September 2022 will also need to register before they can become the registered legal owner of that real estate.  

Impact on transactions

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.  

This is likely to present significant challenges to some corporate, real estate and banking transactions in the coming months. 

Action required

Failure to comply with the Act promptly may well adversely affect current or future transactions and will expose overseas entities and their officers to criminal sanctions.  

If a company or any company in the group is an overseas entity and owns, has recently disposed of, or is contemplating any transaction in relation to affected real estate, it should give urgent consideration to whether it needs to register with Companies House.  

If any public body is considering entering a transaction with an overseas entity which will involve affected real estate then, in addition to its usual corporate due diligence when seeking democratic approval to proceed, it will need to determine whether the overseas entity should be registered. If they need to be, but are not, they will not be able to become the registered legal owner of the affected real estate and this could have adverse consequences for the public body transacting. Public bodies are unlikely to be comfortable entering into a transaction which results in a criminal offence being committed.

DWF's Real Estate team has produced a comprehensive guide to the key provisions, registration formalities and potential risks for clients. To find out more about the impact of the Act on the Real Estate industry, please contact your usual DWF representative, or contact the team direct enquiries@dwf.law.

Further Reading