Insurance companies are major investors in Commercial Real Estate. The current sanctions regime creates a complex landscape for insurers who must negotiate their way around a web of restrictions, due diligence requirements, and reporting obligations to ensure compliance. One of those areas of regulation is The Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") which has been in full force (following a transition period) since 1st February 2023 and has significant implications for insurers.
The Act is aimed at increasing transparency and combating economic crime in the UK. One of the key areas it addresses is the involvement of overseas entities in real estate transactions in England and Wales. This article outlines the requirements of the Act for overseas entities entering into those transactions, and how the Act assists in avoiding potential breaches of UK sanctions in relation to those transactions. It also considers the requirements for UK companies to register details of ultimate beneficial owners, which helps avoid potential sanctions breaches involving UK companies which are ultimately owned by persons subject to sanctions.
Overseas entities which already owned interests in property before the Act came into full force are still required to comply with the registration requirements relating to ultimate beneficial owners. Failure to do so will inhibit their ability to deal with their property, as the Land Registry will register a restriction on the title to the property which will require compliance with the Act before relevant dealings can be registered.
Once registered, an overseas entity must update the information on the register of beneficial owners at Companies House annually.
By mandating the disclosure of beneficial ownership information, the Act aims to prevent the use of UK real estate for money laundering and other illicit activities. It aims to ensure that the true owners of overseas entities are transparent and accountable, thereby reducing the risk of property being used to conceal the proceeds of crime.
The Act provides a mechanism for verifying the identities of beneficial owners, enabling counterparties to conduct thorough due diligence and ensure that they are not inadvertently breaching sanctions. This increased transparency helps to protect businesses from legal and reputational risks associated with dealing with sanctioned individuals or entities.
This obligation to register details of persons with significant control helps to identify UK companies that are owned or controlled by individuals who may be subject to sanctions. This is an important step in preventing sanctioned individuals from using UK companies to circumvent restrictions and engage in prohibited activities. While there are no similar arrangements directly linking Land Registry requirements to the UK company rules regarding persons of significant control, the requirement to register details of persons with significant control does allow counterparties to identify where there is a risk of non-compliance with sanctions in property transactions involving UK companies.
It is always important that landlords and tenants take appropriate steps to ensure that they can lawfully continue to pay and receive rent under their leases. While the Act creates a framework for actions when dealing with properties, circumstances can change during the term of a lease and it is important to remain vigilant to changes of circumstances, particularly changes in ownership of companies. Well-drafted leases will include appropriate protections against the risk of making or receiving payments becoming unlawful.
The Act is aimed at increasing transparency and combating economic crime in the UK. One of the key areas it addresses is the involvement of overseas entities in real estate transactions in England and Wales. This article outlines the requirements of the Act for overseas entities entering into those transactions, and how the Act assists in avoiding potential breaches of UK sanctions in relation to those transactions. It also considers the requirements for UK companies to register details of ultimate beneficial owners, which helps avoid potential sanctions breaches involving UK companies which are ultimately owned by persons subject to sanctions.
Registration requirements for overseas entities
The Act places restrictions on the ability of overseas entities to deal in real estate in England and Wales. Specifically, it requires overseas entities that own or wish to acquire property to register with Companies House and provide details of their beneficial owners. This registration must be completed before the entity can legally buy, sell, transfer, lease, or charge property where the transaction must be registered at the Land Registry. All such transactions relating to freehold land, or leases granted for a term of more than seven years, must be registered. Failure to comply with these requirements will result in title to the property not being registered, meaning that the relevant party's interest in the property will be at risk.Overseas entities which already owned interests in property before the Act came into full force are still required to comply with the registration requirements relating to ultimate beneficial owners. Failure to do so will inhibit their ability to deal with their property, as the Land Registry will register a restriction on the title to the property which will require compliance with the Act before relevant dealings can be registered.
Once registered, an overseas entity must update the information on the register of beneficial owners at Companies House annually.
By mandating the disclosure of beneficial ownership information, the Act aims to prevent the use of UK real estate for money laundering and other illicit activities. It aims to ensure that the true owners of overseas entities are transparent and accountable, thereby reducing the risk of property being used to conceal the proceeds of crime.
Facilitating sanctions compliance
One important aspect of the Act is its role in facilitating compliance with UK sanctions. By requiring overseas entities to disclose their beneficial owners, the Act makes it easier for counterparties in real estate transactions to identify whether any parties involved are subject to sanctions. This is particularly important in the context of international sanctions regimes, where the ownership structures of entities can be complex and opaque.The Act provides a mechanism for verifying the identities of beneficial owners, enabling counterparties to conduct thorough due diligence and ensure that they are not inadvertently breaching sanctions. This increased transparency helps to protect businesses from legal and reputational risks associated with dealing with sanctioned individuals or entities.
UK companies
In addition to the Act's requirements for overseas entities, UK companies such as insurers are required to register details of their beneficial owners at Companies House. The registration process involves providing information about individuals who have significant control over the company, such as those who hold more than 25% of the shares or voting rights, or who have the power to appoint or remove directors. This information is then made publicly available, allowing for greater scrutiny and accountability.This obligation to register details of persons with significant control helps to identify UK companies that are owned or controlled by individuals who may be subject to sanctions. This is an important step in preventing sanctioned individuals from using UK companies to circumvent restrictions and engage in prohibited activities. While there are no similar arrangements directly linking Land Registry requirements to the UK company rules regarding persons of significant control, the requirement to register details of persons with significant control does allow counterparties to identify where there is a risk of non-compliance with sanctions in property transactions involving UK companies.
Additional protections
While the Act is an important step in reducing the risk of sanctions being breached in property transactions involving overseas entities, it does not directly address every possible scenario. In particular, property owners will still need to make appropriate investigations when granting leases which may not need to be registered at the Land Registry to overseas entities. Leases of land in England and Wales granted for a term which is not greater than seven years do not have to be registered, and so the legal imperative to comply with the Act in order to protect title to such short leases does not apply. If dealing with an overseas entity which does not have details of its beneficial ownership registered at Companies House, steps should always be taken to verify beneficial ownership to protect against a number of risks, including breaches of sanctions and potential money laundering offences.It is always important that landlords and tenants take appropriate steps to ensure that they can lawfully continue to pay and receive rent under their leases. While the Act creates a framework for actions when dealing with properties, circumstances can change during the term of a lease and it is important to remain vigilant to changes of circumstances, particularly changes in ownership of companies. Well-drafted leases will include appropriate protections against the risk of making or receiving payments becoming unlawful.
Conclusion
The Economic Crime (Transparency and Enforcement) Act 2022 was a significant step forward in the UK's efforts to combat economic crime and enhance transparency, particularly in real estate transactions. By imposing restrictions on overseas entities and requiring the disclosure of beneficial ownership information, the Act helps to prevent the misuse of UK property for illicit purposes and supports compliance with sanctions regimes. The requirement for UK companies to register details of ultimate beneficial owners further strengthens the framework for identifying and addressing potential sanctions breaches. Overall, the Act provides a mechanism for ensuring that real estate transactions in England and Wales are conducted with greater transparency and accountability.
For insurers the Act places a greater onus on insurers to be aware of, and comply with, regulations concerning beneficial ownership of land in the UK, particularly for overseas entities. This requires a proactive approach to risk management, due diligence, and client communication.
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