This blog post was previously published by The Law Society Gazette.

On March 1, 2022, the UK Government put forward the Economic Crime (Enforcement and Transparency) Bill.  The stated aim of the legislation is to “crack down on dirty money in the UK and corrupt elites”, and it is designed to target laundered Russian money in the UK, following Russia’s invasion of Ukraine.¹

This blog post considers how effective the draft Bill’s proposals are likely to be in preventing financial crime and whether the Bill’s less publicised financial sanctions proposals may prove to be more effective than its proposals relating to the register of overseas owners of UK property and the unexplained wealth order (UWO) regime.

The Bill puts forward three key proposals:

1. Establishing a register of overseas owners of UK property

   This register will require anonymous foreign owners of UK property to register their identities.  It aims to ensure that criminals cannot hide their property ownership behind chains of shell companies.  The rules will apply to overseas companies, and to any foreign individual who holds more than 25% of the shares or voting rights in a company.

   The rules will apply retrospectively to property bought up to 20 years ago in England and Wales, and since December 2014 in Scotland.  Property owners will have six months to comply with the new rules.  Failing to comply with the rules will result in a daily fine of £2,500, or a prison sentence of up to five years for the most serious contraventions.

2. Strengthening UWOs

   The Bill will bring individuals who own property in the UK through trusts and shell companies into the scope of the UWO rules.  Enforcement agencies will also be given more time to prepare UWO cases and they will be protected from bearing legal costs in cases where they unsuccessfully seek a UWO, unless they acted unreasonably in seeking that UWO. 

3. Strengthening the civil financial sanctions regime
   

   Individuals and companies that breach a financial sanctions prohibition or fail to comply with a financial sanctions obligation will now be subject to civil monetary penalties imposed by the Office of Financial Sanctions Implementation (OFSI) on a strict liability basis.  Even in circumstances where no monetary fine is imposed, OFSI will be empowered to periodically publicly identify companies and individuals that it suspects, on the balance of probabilities (i.e. more likely than not), to have breached a financial sanctions prohibition or failed to comply with a financial sanctions obligation.

Will the proposals be effective?

Register of overseas owners

Under the proposals, foreign companies must provide company registration details, addresses, and contact details to Companies House to purchase property in the UK.  Individuals must provide details including their name, date of birth, nationality, and address.  Companies House may scrutinise the information provided, but it will also be reliant on foreign companies’ and individuals’ assertions that the information provided is accurate and complete.  If a company is registered in the British Virgin Islands, for example, Companies House may be unable to check the provided information about beneficial owners of that company.

Although a company will commit a criminal offence under the Bill if it provides false information, if that company is knowingly laundering money, it is unlikely to be motivated to act honestly by the threat of criminal sanctions.  The need for such good faith reliance has the potential to render the requirement meaningless.

The retroactive application of the Bill may also cause problems.  It is hard to imagine how Companies House will have sufficient resources to check that every overseas company that has purchased a property in the last 20 years is complying with the new legislation.  The Government stated that it has provided Companies House with £20 million this financial year and a further £63 million announced at the spending review to deliver this new register.²  But ensuring retroactive compliance with this new legislation could require examining 20 years’ worth of entries on the Land Registry.  It will also require contacting non-compliant foreign companies, which will be difficult due to the lack of information that these companies have historically been required to provide to purchase property.  It seems unlikely that an additional £63 million will be enough to ensure retroactive compliance.

Strengthening the UWO regime

We discussed the problems that enforcement agencies face in bringing UWOs in a previous blog post, and this draft Bill aims to address some of these. But the proposed changes to the UWO regime do not alter enforcement authorities’ obligations to effectively investigate companies and individuals, and to pursue UWOs only in appropriate cases.  In the Baker case³, the High Court criticized the National Crime Agency (NCA) for a catalogue of investigative errors and for reaching erroneous factual conclusions.  The Bill aims to make it easier for enforcement authorities to seek UWOs, but authorities must still obtain sufficient evidence to demonstrate that the requirements for obtaining a UWO are met.  This relies on the NCA and other enforcement authorities ensuring that their investigation processes are up to scratch following the judicial criticisms advanced in Baker.

Strengthening the civil financial sanctions regime

The sanctions proposals, in contrast, are significant.  OFSI has previously had limited success enforcing breaches of sanctions rules, issuing six fines in the six years since it was created.  The Bill will make it far easier for civil fines to be imposed for breaching prohibitions or failing to comply with obligations by amending the existing legislation to permit the imposition of fines on a strict liability basis. This means that the previous requirement to establish that a person or company knew or had reasonable cause to suspect that they were in breach of a prohibition or had failed to comply with an obligation will be removed.  Under the terms of the Bill, the fact that the sanctions rules were breached will be sufficient to establish civil liability. This new lower legal threshold for establishing liability, along with the potential reputational damage of being identified by OFSI as being suspected of breaching the sanctions regime, even where no financial penalty is imposed, are both likely to focus the minds of relevant companies.

Conclusion

Most of the media reporting on the Bill has inevitably focused on the proposed register of overseas owners of UK property and the strengthening of the UWO regime.  The less publicised financial sanctions proposals, however, may ultimately prove to be more significant and effective in achieving the Bill’s stated aims.  The Government plans to pass the Bill into law as soon as possible.  Its progress through Parliament will be keenly watched, and it has the potential to be one of the most significant legislative developments in recent years.