11 August 2022

Register of Overseas Entities - Economic Crime (Transparency and Enforcement) Act 2022

Practical Summary – Key Points:

• Pursuant to the Economic Crime (Transparency and Enforcement) Act 2022 (Act), the Register of Overseas Entities (ROE) came into force on 1st August 2022 to improve transparency of ownership of UK land by Overseas Entities and prevent an abuse of control.
• An ‘overseas entity’ is defined as a legal entity that is governed by laws outside of the UK. Under the Act, a legal entity is a body corporate, partnership or other entity that is a legal person under its governing law.
• Any overseas entity that owns land, sold a property since 28th February 2022, or wishes to own land in the UK (OE) must register with Companies House and identify all beneficial owners and/or managing officers by the end of the transitional period being the 31st January 2023, as well as provide details of any dispositions since 28th February 2022. Any failure to adhere to this new rule will lead to the Land Registry registering a restriction on Title where the ownership is registered (which will stop the OE from being able to do anything with the property), and it will stop any OE from becoming a proprietor, buying, selling, raising finance, or even granting a lease.
• For new transactions that will be registered at the Land Registry on or after 5th September 2022, the OE will need to apply for registration on the ROE (unless they are already registered) before the property transaction can be registered at the Land Registry.
• The Act will apply retrospectively to OEs who bought property or land on or after the 1st January 1999 in England & Wales or 8th of December 2014 in Scotland.
• Failure to comply could lead to criminal offences for the company and its officers, fines of up to £2,500 per day, or even a prison sentence of up to 5 years.

Banks & Financial Institutions

Banks and financial institutions will not be able to provide loans to OEs unless they have complied with all registration formalities. This is partly because no bank or financial institution will wish to provide facilities to an entity that is not compliant with the laws of the country. It is also unlikely to be able to register its security for any facilities it is providing to the OE.

Furthermore, the new rules could affect existing facility or financing arrangements in the event of failure to apply the registration requirements, which might give rise to an event of default under the terms and conditions of the financing.

Investor Clients

All overseas investor clients will have to ensure that they are compliant with the Act which means that if they are an OE they will need to register to avoid the risk of fines and prosecution. Unless all due registrations have taken place an investor will not be able to register its interest or deal freely with any property that it might own in the UK.

Key Dates

The Specific Detail

What is the New Register of Overseas Entities (ROE) and why was it introduced?

On 1st August 2022, the ROE came into force in the UK by way of the new Economic Crime (Transparency and Enforcement) Act 2022. The implementation of the ROE is to improve the transparency of ownership of UK land by overseas entities.

This Bill was first proposed by David Cameron, the then Prime Minister, in 2016 at an anti-corruption summit to foreign companies, where he explained that they would be required to disclose the beneficial ownership of UK property. This new register will form part of the government’s strategy to combat economic crime, meanwhile ensuring that legitimate businesses continue to see the UK as a safe and valuable place to invest. This Bill has been fast-tracked by the UK government in response to the Russian invasion of Ukraine. The ROE will prevent transactions from being registered where there is a breach of the legislation, which will prevent an abuse of power or control from Oversea entities disobeying the regulation.

What is an Overseas Entity?

An ‘Overseas Entity’ (OE) is a legal entity that has a legal personality and is governed by the laws of a country or territory outside the UK. This would include non-UK incorporated companies, LLPs, foreign foundations, and non-UK partnerships with a legal personality. This also includes companies incorporated in one of the Channel Islands, the Isle of Man, the Republic of Ireland and the British Virgin Islands.

The OE is required to register with Companies House and identify the registrable beneficial owners or managing officers by the 31st January 2023. They will also have to retrospectively provide details of any dispositions since the 28th February 2022 until the end of the transitional period to Companies House. After the Companies House Registration process is complete, the OE will receive an “Overseas Entity ID.”

What is a beneficial Owner?

This is an entity that has significant influence or control over the OE.

Examples of a beneficial owner include:

• An individual person
• An individual person
• An individual person
• A government or public authority
• A trustee of a trust
• A member of a firm that is not a legal person under its governing law

The beneficial owner

• Holds, directly or indirectly, more than 25% of the shares in the entity
• Holds, directly or indirectly, more than 25% of the voting rights in the entity
• Holds the right, directly or indirectly, to appoint or remove most of the board of directors of the entity
• Has the right to exercise, or exercises, significant influence or control over the entity

Why this is important and the impacts of this Act

Any Overseas Entity that owns property in the UK must register under the ROE. Failure to comply with this new rule means that the OE will not be registered as a new proprietor at the Land Registry.

OEs will be obliged to comply with annual updates and failure to do so means that the OE and its officers will commit criminal offences, face fines of up to £2,500 per day, or even get a prison sentence of up to 5 years.

Importantly, this new act will apply retrospectively to OEs who bought property or land on or after 1st January 1999 in England & Wales or, 8th December 2014 in Scotland.

Transitional Period

• OEs will have to abide by the Act before the end of the 6-month transitional period.
• OEs will have restrictions placed on their Title at the same time as being registered as proprietors.

Examples

• An overseas company, registered outside the UK, wants to acquire a property within the UK. This company has 5 owners with a different percentage of ownership. The owners with over 25% ownership and voting rights, directly or indirectly, will be registrable under the definition of a beneficial owner. The owners with under 25% ownership and voting rights will not (unless they have the right to exercise, or do exercise, significant influence or control over the entity). However, the company would need to register as an OE before the acquisition is complete.
• An OE is a UK freeholder, but no person holds, directly or indirectly, 25% or more of the shares or voting rights in the company and does not have the right to exercise, and does not exercise, significant influence or control over the company. This means that the OE will still need to register, even though there are no beneficial owners and no one exercising significant influence or control over the company.
• If an OE purchased a UK freehold after 1st January 1999, they would still need to register within the 6-month transitional period even if they plan on selling the property within this timeframe.

The team here at Spector Constant & Williams is well placed to advise on the requirement for, and to facilitate, any necessary registrations or de-enveloping transactions should this be a necessary or desirable alternative. For further information please contact us.