New Regulations to Prevent Money Laundering Through Property
Economic fraud is one of the most common crimes in the UK, often experienced by ordinary people in everyday life, as one in 15 of us falls victim to it every year. Fraud, however, affects every level of the financial system. As countries become increasingly interconnected and the movement of money ever faster and more fluid, the task of tracing suspicious wealth becomes a vastly more complicated one.
In its Economic Crime Plan 2019-2022, the Government set out its latest strategy for combatting money laundering and terrorist financing. As money laundering and criminal transactions are often carry out through complex corporate structures or overseas companies in order to hide the identities of those involved, better systems are needed for gathering information and a more efficient mechanism of enforcement.
A recent piece of Government legislation aims to provide just that.
The Economic Crime (Transparency and Enforcement) Act 2022, which came into force on 1 August 2022, deals specifically with property ownership and property transactions by overseas companies. It introduces a new Register of Overseas Entities and gives Companies House new powers to enforce the requirements under the Act.
What is the Register of Overseas Entities?
The Register of Overseas Entities holds information on companies, organisations, trusts, and other legal entities that are governed by the law of a country or territory outside the UK. Any overseas company or organisation, in order to own or transfer property in the UK, must now be entered into the register. This is done by providing information to Companies House about the overseas entity and its beneficial owners.
The information provided to Companies House must also be verified by an agent in the UK. The agent can be a legal professional, financial institution or other person who would normally be able to carry out traditional anti money laundering checks, although in practice the application process as a whole seems designed to be incorporated into a conveyancing package.
How will the new system work?
When an overseas entity is registered with Companies House, it receives an ID number linked to its entry in the register. For the ID number to be valid, the information held in the register must be updated (and verified) annually.
This ID number will be needed for applications to the land registry, whether is it to register a transfer, the grant of a lease, or a legal charge. The Land Registry will reject applications where an ID number is not supplied or where it relates to information that has not been updated. The result would be that any overseas company, say, buying a property in the UK would have an inbuilt incentive to comply with their ongoing obligations to Companies House because the company’s ownership of the property simply will not be registered on the property title otherwise.
How will the new system be implemented?
Overseas entities that already own an interest in UK property must apply to be registered within a six-month transition period ending on 31 January 2023.
Failure to meet the deadline can result in hefty fines or even a prison sentence.
Any overseas entity that wishes to buy property in the UK going forward will simply need to register with Companies House at any point, but will be unable to complete the registration of their transaction until they have done so.
There is a shorter transition period, during which the Land Registry continues to approve applications without an ID number provided by Companies House, in order to allow transactions currently underway to complete. The deadline for these applications is on 5 September 2022.
Will it work?
The new system relies on the desire of overseas companies to invest in property the UK which, if it is there, will drive the supply of information that the Government needs in order to ensure that business transactions are legitimate while automatically sifting out those companies that are unable to provide verifiable information.
Reducing criminals’ ability to hide behind corporations in foreign jurisdictions ought logically to reduce the amount of criminal activity in this area. On the other hand, doing it by imposing another layer of legal and administrative obligations on all overseas companies seeking to invest in UK property may discourage legitimate business too.
Time, cost and complexity are all factors that affect the viability of a property transaction, and we do not yet know to what extent these will have to be adjusted to accommodate the new regulations.