The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) received Royal Assent on 15 March 2022, just over two weeks after it was introduced into the House of Commons. The Act is part of a wider package of legislative proposals to tackle economic crime and was recently fast tracked as part of the UK's response to Russia's invasion of Ukraine.
The Act introduces requirements for beneficial ownership registers in respect of UK property and amends existing laws in relation to unexplained wealth orders (UWOs) and economic sanctions. The only provisions that came into force with immediate effect are those that streamline the process for imposing economic sanctions. Other provisions of the Act will be brought into force through regulations.
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) empowers the government to make sanctions regulations for the purposes of compliance with UN or other international obligations, or for specified discretionary purposes such as peace and security, foreign policy objectives and human rights.
Prior to the Act, the government could only make sanctions regulations in relation to these discretionary purposes following a consideration of whether, and determination that, there were good reasons to pursue the identified purpose and that the imposition of sanctions was a reasonable course of action for the identified purpose. The reasoning had to be set out in a report put before Parliament. The Act has had the effect of removing these procedural requirements.
In addition, the government may now designate an individual or entity as a sanctions target under either a "standard procedure" (which is broadly similar to the procedure in place prior to the Act) or a new "urgent procedure" introduced by the Act.
Under the standard procedure, the government may designate an individual or entity where it has reasonable grounds to suspect that they are an "involved person", meaning someone who is or has been involved in an activity specified in the sanctions regime regulations or who is owned, controlled, associated with or acting on behalf of or at the direction of, such a person. Certain previous requirements, including the need to consider the "significant effects of the designation" on the person to be designated, have been removed.
The urgent procedure introduced into SAMLA by the Act enables the UK government to designate an individual or entity as a sanctions target purely on the basis that they have already been designated by the US, the EU, Australia or Canada (or any other country specified by regulation) and that it is in the public interest to do so. The designation is for an initial period of 56 days and may be extended for one further period of 56 days provided the same conditions continue to be met. Subsequently, the designation may only be continued if the conditions under the standard procedure in SAMLA are met. The urgent procedure enables the government to streamline the alignment of UK sanctions with the sanctions regimes of its allies. The government relied on these provisions for the purposes of sanctioning a large number of individuals in relation to Russia on 15 March, only a few hours after the Act was passed.
ENHANCING OFSI'S ENFORCEMENT POWERS
The Office of Financial Sanctions Implementation (OFSI) implements and enforces sanctions in the UK. In 2017 OFSI was given civil enforcement powers through the Policing and Crime Act 2017. These powers were triggered where OFSI was satisfied on the balance of probabilities that a person knew, or had reasonable cause to suspect that it had breached a sanctions obligation. The Act materially amends OFSI's sanctioning powers by introducing a standard of strict liability for civil breaches of UK sanctions. It does this by amending the Policing and Crime Act 2017 to permit OFSI to impose a monetary penalty on a person who breaches sanctions legislation regardless of whether the person knew or suspected that they had committed a breach. The Act also empowers OFSI to publicly name persons who have breached sanctions but have not been fined.
This is a significant change that creates heightened enforcement risk for companies subject to how OFSI uses its enforcement powers. We understand that OFSI intends to issue guidance in relation to these changes in due course.
REGISTER OF OVERSEAS ENTITIES
The Act creates a register (overseen by Companies House) of overseas entities that own UK property that includes information about their beneficial owners (the Register). The Act defines a beneficial owner as a person who directly or indirectly holds over 25% of the shares or voting rights in the overseas entity, or holds the right to appoint or remove a majority of the board of directors. A beneficial owner is also someone who has the right to exercise, or actually exercises, significant influence or control over the overseas entity. For trusts and partnerships, a beneficial owner is the trustees of a trust or the members of a partnership (or other entity) who meet the above conditions.
The Act will apply retrospectively to property acquired since January 1999 for property in England and Wales, and since December 2014 in Scotland. Prior to applying for registration the overseas entity must take reasonable steps to identify its registrable beneficial owners and certain information in relation to them. These steps include giving an information notice to any person that the overseas entity knows, or has reasonable cause to believe, is its registrable beneficial owner. The information notice requires the recipient to confirm whether they are a registrable beneficial owner and, if so, to provide the information required to register them.
The overseas entity may also give an information notice to a person it knows or has reasonable cause to believe knows the identity of the overseas entity's registrable beneficial owners. The recipient must supply any information it knows that would assist with the identification of a registrable beneficial owner.
Once registered, the overseas entity must either confirm the information previously provided is still accurate or provide updated information to the registrar every twelve months.
Any person may apply to see the Register. However, certain information such as date of birth, residential address and contact details will not be made available for public inspection.
In the absence of a reasonable excuse, it is an offence to fail to comply with an information notice, provide false information in response to such a notice or provide misleading, false or deceptive material to the registrar. Failure to provide the annual update is also an offence. For most offences under the Act, defaulting officers as well as the overseas entity may be guilty.
The government first indicated that it would create a beneficial ownership register for properties and land in 2016 and the delay in introducing it had attracted criticism. The UK already holds beneficial ownership information in relation to UK companies (on the People with Significant Control register). The UK has also introduced a register for trusts, which is not public and is currently being expanded in order to comply with the UK's obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
UNEXPLAINED WEALTH ORDERS
UWOs are court orders that require a person to set out the nature and extent of their interest in property and explain how they obtained it, together with other information. UWOs are available to law enforcement in respect of Politically Exposed Persons and also persons suspected of involvement in serious crime, in both cases where there are reasonable grounds to suspect that their known lawful income would be insufficient to buy the relevant property. In the absence of an adequate explanation, the relevant property can be frozen and ultimately seized.
The Act aims to strengthen the current UWO regime by ensuring that law enforcement can use its powers to maximum effect. The Act extends the period for which an interim freezing order may take effect up to a maximum of 186 days. The court may grant extensions to the initial freezing order where it is satisfied that the enforcement authority: (i) needs more time to determine what enforcement or investigatory proceedings should be taken; and (ii) is working diligently and expeditiously towards that end, provided that the extension is reasonable in all the circumstances.
The Act also prohibits the court from awarding costs against an enforcement authority in UWO or UWO related proceedings (such as interim freezing orders and applications in relation to receivers) except where the enforcement authority has acted unreasonably in making or opposing an application, or dishonestly or improperly in the course of the proceedings. For certain property where the respondent is not an individual, the application for a UWO may also specify a responsible officer (for example, directors, shadow directors and managers) as well as the respondent to provide the required explanation of the respondent's wealth or to produce any documents.