The impact of the Russian invasion of Ukraine is likely to reverberate through Europe and across the rest of the world for years if not decades to come.
While some questions have been asked about the speed and effectiveness of the UK government’s response, the changes that have been introduced will not only impact the Russian economy but will also alter the legislative landscape of the UK, with particular reference to the regime around ‘persons with significant control’ of a company.
The Economic Crime (Transparency and Enforcement) Bill which has been brought forward and will be fast tracked through the Houses of Parliament in response to the war in Ukraine, represents the culmination of a shift which has been on-going for several years but which – until now – was proceeding at a somewhat stately pace.
Although much of the conversation around the new laws will centre upon the impact they are likely to have on the many Russian oligarchs with strong financial and business links to the UK, the laws introduced will apply across the board, and represent a genuine bolstering of – amongst other things – the legal instruments known as Unexplained Wealth orders (UWOs).
UWOs were originally introduced by the Criminal Finances Act 2017 and were intended to make it easier to deal with the problem of ‘dirty money’ being laundered through the purchasing of assets. In simple terms, the UWOs switched the traditional burden of proof around; if a law enforcement agency suspected that assets had been purchased through criminal activity then the onus was on the owner to explain how they had been obtained.
A failure to provide such an explanation would, in theory, lead to the property in question being confiscated. Despite the stated intention to use UWOs in the fight against money laundering, only nine UWOs have been obtained since 2017, and no orders whatsoever have been made in the last two years.
Upon their introduction as part of civil rather than criminal law, UWOs were hailed as being a game changing tool, although they could only be issued by the High Court in response to an application from a UK enforcement authority in the following circumstances:
- The recipient of the UWO is a ‘Politically Exposed Person’ or there are reasonable grounds for suspecting that they have been guilty of committing serious crime in the UK or elsewhere, or of being connected to someone who has done so.
- The property to which the UWO relates is worth more than £50,000.
- There are reasonable grounds to suspect that the lawfully obtained income of the recipient of the UWO, from known and verified sources, would be insufficient on their own to have enabled the recipient to obtain the property
One of the main flaws of the original UWO legislation, and a major reason why they have been used so sparingly, is that a successful challenge by the recipient of the UWO could, when the normal civil rules on costs were applied, lead to the enforcement agency in question having to pay not only their own legal fees but also those of the recipient. In one particular case – involving the daughter and grandson of a former president of Kazakhstan – the National Crime Agency (NCA) used a UWO to freeze London properties worth £80 million, on the basis of suspicions that the money used to purchase them had come from criminal sources. When the recipients of the UWOs applied to the High Court to have them dismissed they won their case, leaving the NCA facing a legal bill of £1.5 million.
A result like this would be bound to make other enforcement agencies think twice about reaching for UWOs, particularly given the complex - but still legal – nature of the financial arrangements of the kind of ultra high net-worth individuals such orders would be used against.
The new legislation seeks to eliminate the risks of a hefty legal bill by stating that a court cannot order costs against an enforcement authority following an unsuccessful application for a UWO, except in highly limited circumstances which include the enforcement agency having acted unreasonably in making the application or dishonestly, or improperly, over the course of the proceedings.
At the same time, the scope of UWOs will be extended to cover UK properties which are held in trusts, while enforcement authorities will now have an increased time period of up to 186 days to review any material which is provided in response to a UWO.
Another part of the Bill relates to the imposition of sanctions on Russia (or any other country going forward), and the treatment meted out to those organisations which breach any sanctions put in place. Under the new legislation, the test for liability will have a significantly lower threshold than is now the case, with the requirement for the organisation in question to have either knowledge or ‘a reasonable cause to expect’ that sanctions are being breached, no longer forming part of the law.
Under the new legislation, the Office for Financial Sanctions Implementation (OFSI) will be expected to impose more fines on more organisations. In addition, OFSI will have the legal right to identify any organisations which have breached sanctions without being fined, while the NCA has announced the creation of a new ‘kleptocracy’ unit to investigate breaches of sanctions, although the fact that, to date, no new funding has been earmarked for the unit, means that its effectiveness may be minimal.
One of the issues which has caused concern for many people before being pushed to the top of the agenda by the invasion of Ukraine, was the lack of transparency which surrounds overseas ownership of UK property. The bill proposes the creation of a beneficial ownership register designed to level the playing field between UK companies which already have to report on beneficial ownership to Companies House, and those based overseas, by identifying the beneficial owners of overseas entities with interests in UK properties.
The register will be maintained by Companies House and will be publicly available and follows the template of the register of ‘persons with significant control’ of a UK company, which was introduced in 2016. Every overseas entity featured on the new register will have to supply information including the details of its registrable beneficial owners and any ‘managing officers’ such as a director, manager or secretary.
Anyone submitting information which is false or misleading to the register could potentially find themselves facing a fine, a two-year prison sentence or a combination of both. The information contained on the register will have to be updated annually and if it isn’t, then the entity and its officers will be liable for a fine. If the situation persists, this would become a daily default fine of not more than £500.
It will not be legal for an overseas entity to own property in the UK without being entered on the register, and this will be applied retrospectively to any properties purchased by overseas entities in England and Wales after 1st January 1999.
If the overseas entity doesn’t retrospectively place themselves on the register, they will restrictions when selling the property. A transition period of 18 months will be in place from the day the Bill becomes law to enable any historic transactions to be placed on the register, and before any restrictions are enforced.
These restrictions will first take the form of a Government notice requiring the entity to register within 6 months, and if this doesn’t have the desired effect, a fine will be levied on the overseas entity and every officer of that entity will find themselves facing a two year prison sentence, a fine, or a combination of the two punishments.
The definition of ‘beneficial owners’ used by the new Bill will be based on the criteria already set out in Schedule 1 of the Companies Act 2006, to define a ‘person with significant control’ of a UK company. In order to be deemed a ‘beneficial owner’ of an overseas entity for the purposes of the register, a person or entity will have to meet at least one of the following conditions:
- They hold, directly or indirectly, more than 25% in the overseas entity
- They hold, directly or indirectly, more than 25% of the voting rights in the overseas entity
- They hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity
- They have the right to exercise, or actually exercise, significant influence or control over the overseas entity
- They are trustees of a trust, members of a partnership, unincorporated association or other entity which is not a legal person under the law by which it is governed; and they have the right to exercise, or actually exercise, significant influence or control over the activities of that trust or entity
Despite the seeming good intentions of this new register questions have been asked about how it will be enforced in reality. In its current form a register of this kind would impose significant extra work on Companies House and the Land Registry and would require extra funding to make enforcement a practical reality.
Only in the months going forward will it become clear whether the new register, as well as the other measures contained in the Bill, will have the impact the government presumably intends.
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