Economic Crime (Transparency and Enforcement) Act 2022 – Implications for Property Transactions

August.16.2022

The Act – an overview

The Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") received royal assent on 15 March 2022 and key aspects of the Act summarised below came into force in the UK on 1 August 2022.

The aim of the Act is to increase transparency on who owns or controls overseas entities owning property in the UK. The Act has been under discussion since 2016 as a tool to combat criminal activity and investigate suspicious wealth but the UK Government has accelerated legislation due to recent international political events.

The Act will have a significant impact on any overseas entities that already own or lease UK property – this is thought to include 100,000 titles in England and Wales and 35,000 overseas entities – or overseas entities that intend to buy or lease UK property.

Broadly, the Act requires overseas entities who already own, or are seeking to acquire, UK real estate to register on the new Register of Overseas Entities (the "ROE") to be maintained by Companies House. The application to register would include telling Companies House about the beneficial owners and (in some cases) the managing officers of the company as part of the registration, subject to limited exceptions.

On registration, Companies House will issue overseas companies with a unique overseas entity identification number (an "OE-ID").

The overseas entity will not be able to register the acquisition of UK property, or will face restrictions on disposing of its property, if it fails to register on the ROE and disclose the OE-ID to HM Land Registry within the time periods set out in the Act.

Subject to the further details set out below, the Act applies retrospectively to overseas entities which acquired freehold and certain leasehold property in England and Wales on or after 1 January 1999. These entities will need to register on the ROE by 31 January 2023. If the entity disposed of the property after 28 February 2022, details of the transaction must also be given to Companies House. 

Overseas entities that are proprietors of registered charges of property do not fall within this regime. Overseas entities that grant registered charges of relevant UK property will be caught.

The Act applies to overseas entities acquiring property from 5 September 2022.

In addition to these practical restrictions on how land can be dealt with, breach of the Act could lead to criminal sanctions which are more serious than for similar compliance regimes (including fines and/or imprisonment) for the entity and, in some circumstances, its officers.

While the Act also makes provision for properties located in Scotland and Northern Ireland, this briefing considers the rules applicable to land in England and Wales.

What "overseas entities" are covered?

The Act defines an overseas entity as a legal entity (a body corporate, partnership or other entity) governed by the law of a country or territory outside the UK. An overseas entity will therefore include entities based in the Channel Islands, the Isle of Man or the Republic of Ireland.

The Act contemplates an “exempt overseas entity” as being outside the scope of the Act but the legislation does not yet define this term. Currently, all overseas entities with relevant interests in UK property need to consider what actions they need to take under the Act.

The following are not affected by the Act and are not required to register on the ROE:

  • Overseas entities which do not have interests in UK property.
  • Individuals who are property owners domiciled outside the UK, unless the individual is a registrable beneficial owner of any overseas entity.
  • Overseas entities that are parties to a disposition or acquisition but not the registered proprietor or applicant (such as a guarantor or management company).

What beneficial owners need to be disclosed?

To be registered on the ROE, an overseas entity must submit information about its beneficial owners. Companies House has issued guidance (see the link at the end of this briefing) about what information must be submitted and the scope of the terms used but broadly a “beneficial owner” includes a person who:

  • directly or indirectly holds more than 25% of the shares or voting rights in an entity;
  • directly or indirectly can appoint or remove a majority of its directors; or
  • has the right to exercise, or actually exercises, significant influence or control over the entity.

In some cases, information about trusts above the overseas entity also must be disclosed to Companies House.

If none of the owners meet the criteria to be deemed a "registrable beneficial owner" or if some of them are unknown when information is submitted, the overseas entity will need to provide information in relation to its managing officers (e.g. directors). 

Information about beneficial owners and managing officers will be publicly available on the ROE. Information about trusts will not, although Companies House may pass information to government bodies (e.g. HM Revenue & Customs). Certain personal data relating to the owners or officers can be exempted from the public record if the person makes an application to Companies House.

The Act does not apply to trusts or beneficial owners of the land or property – the Act applies to owners and beneficial owners of the overseas entities that own land. However, if a trustee of a trust of land is an overseas entity, the Act could apply to the trustee entity itself.

There are safeguards to make sure that information provided to Companies House is up-to-date and correct. A UK-regulated anti money laundering agent must complete verification checks on all relevant information supplied with the application no more than three months before registration on the ROE.

What legal interests in land and property are covered?

The Act relates to a "qualifying estate", being a freehold interest in land, a leasehold interest in land granted for a term of more than 7 years from the date of grant, or (in relation to dispositions only) a legal mortgage. 

The Act applies to an existing owner, whether or not it plans to dispose of property

The Act makes it a criminal offence if an overseas entity:

  • holds a qualifying estate in freehold or leasehold land and became the registered proprietor by an application made on or after 1 January 1999 but before 1 August 2022; and
  • is not registered on the ROE within a 6-month transitional period beginning on 1 August 2022 and ending on 31 January 2023, unless the overseas entity is either exempt, or has made an application to be registered as an overseas entity which is pending.

The application must also include certain prescribed information including, until 31 January 2023, a statement as to whether or not the entity has made a relevant disposition of land during the period from 28 February 2022 to the date of the application.

When an overseas entity owns a qualifying estate in England and Wales which is unregistered, or occupies land by adverse possession, it will not be able to register the estate at HM Land Registry without providing an OE-ID. Because these are voluntary applications, the restrictions will apply whether or not land was acquired or occupied before 1 January 1999.

Ability of the Secretary of State to require registration of overseas entities

From 5 September 2022, the Act permits the Secretary of State to serve notice on an overseas entity compelling it to apply for registration on the ROE within a 6-month period, if the entity is registered as the proprietor of a qualifying estate (further to an application made on or after 1 January 1999) and the entity is not registered as an overseas entity, has not made an application for registration that is pending and is not exempt.

Restrictions on disposals by overseas entities

The Act includes a transitional period ending on 31 January 2023 when an overseas entity can dispose of a qualifying estate without being registered on the ROE and without having to give HM Land Registry its OE-ID. The entity will need to notify Companies House of the disposal as part of its application to register on the ROE.

An overseas entity must still take actions during the transitional period as the Act makes it a criminal offence if

  • the overseas entity makes a "relevant disposition" of a qualifying estate during the period beginning with 28 February 2022 and ending on 31 January 2023; and
  • on 31 January 2023 the overseas entity is not registered on the ROE (and has not made a pending application), and is not exempt; and
  • the overseas entity has not, after making the "relevant disposition" but before 31 January 2023, delivered to Companies House the statements and information concerning the disposition and beneficial ownership required by the Act.

From 1 February 2023, it will be a criminal offence if the overseas entity makes a "relevant disposition" of a qualifying estate (subject to limited exceptions set out in the Act) unless the entity is registered on the ROE with an OE-ID, or is exempt, at the time of the disposition.

A "relevant disposition" of land is a transfer, the grant of a lease for a term of more than 7 years from the date of the grant, or the grant of a legal charge, so prospective purchasers, tenants and lenders taking security will be affected. Limited exceptions where a disposition will not be caught by the Act include where the disposition is by operation of law, required by court order, or in specific insolvency scenarios.

Restrictions on registration at HM Land Registry

The Act provides for changes to the Land Registration Act 2002 (taking effect on 5 September 2022) to restrict the registration at HM Land Registry of dispositions of qualifying estates by overseas entities.

Where the overseas entity is registered as a proprietor

  • HM Land Registry must enter a restriction on the title register for a qualifying estate in England and Wales if HM Land Registry is satisfied that an overseas entity is the registered proprietor and became registered by an application made on or after 1 January 1999. The restriction is to prohibit the registration of any "relevant disposition" of the qualifying estate unless (subject to limited exceptions set out in the Act) the entity is registered on the ROE with an OE-ID, or is exempt, at the time of the disposition.
  • HM Land Registry will automatically add the restriction on the title of all registered qualifying estates in England and Wales if it is satisfied that an overseas entity is registered as proprietor further to an application made on or after 1 January 1999. HM Land Registry hopes to complete this process by the end of the transitional period on 31 January 2023 but it is unclear how long it will take in practice.

Where the overseas entity is entitled to be registered as a proprietor but is not registered

  • The Act requires that, where an overseas entity is entitled to be registered as the proprietor of a qualifying estate (and became so entitled on or after 5 September 2022), and makes a relevant disposition, then the disposition must not be registered unless (subject to limited exceptions set out in the Act) the entity is registered on the ROE with an OE-ID, or is exempt, at the time of the disposition.

Restrictions on acquisition by overseas entities acquiring a qualifying estate

From 5 September 2022, the Act provides that an overseas entity cannot make an application to be registered as the proprietor of a qualifying estate in England and Wales unless, at the time of the application, the overseas entity is registered on the ROE or is exempt.

In practice this means that the overseas entity must give HM Land Registry its unique OE-ID before it can be registered as the proprietor of the freehold or leasehold property acquired. The OE-ID will then be added to the new register of title along with the restriction on dispositions referred to above.

Are there any ongoing obligations for overseas entities registered on the ROE?

So that the ROE is kept up-to-date, the Act requires registered overseas entities to provide updated statements and information in respect of beneficial ownership and other relevant information within 14 days after each update period. The standard update period is the 12-month period from the date of the overseas entity's registration on the ROE and each subsequent 12-month period. The same independent verification requirements that applied to the original application will apply to this updated information. An overseas entity that fails to comply with the updating duty is not to be treated as a registered overseas entity until it remedies the failure, even if it has an OE-ID. 

Can an overseas entity apply to be removed from the ROE once it is registered?

An overseas entity can apply to Companies House to be removed from the ROE if it is not, or is no longer, a registered proprietor of a qualifying estate in England and Wales – for example, if it sells its interest in the qualifying estate or its lease expires. The Act sets out what the removal application must include, although the provisions of the Act are not yet in force.

Additional guidance

Some parts of the Act have yet to come into force and regulations to supplement parts of the Act are awaited. Government bodies affected have issued more detailed guidance and we expect this to be updated as the new system develops.

  • Companies House has issued guidance on how to add an overseas entity and its registrable beneficial owners or managing officers to the ROE here.
  • A copy of the template letter published by Companies House to overseas entities who are registered proprietors of qualifying estates can be found here.
  • HM Land Registry has issued a new Practice Guide on overseas entities here. Appendix 3 to the Practice Guide contains some examples of evidence that might need to be provided with applications involving overseas entities.
  • The UK Government (Department for Business, Energy & Industrial Strategy) has issued technical guidance for registration and verification on the ROE here.