By John Binns, partner in the financial crime team at BCL Solicitors LLP
Two truths
The introduction of a register of overseas entities that own land in the UK, under the cumbersomely named Economic Crime (Transparency and Enforcement) Act 2022, recognises two fundamental truths about people who handle property that represents the proceeds of crime, money launderers, or is subject to financial sanctions. The first is that they remain particularly interested in the UK property market, as a place to store and grow the value generated from criminal conduct. The second is that they dislike transparency.
The new requirements on overseas entities to ascertain and provide details of their beneficial owners, which broadly speaking, includes any individual or entity who holds more than 25% of their shares or voting rights, is a prime example of the generally accepted strategy of using transparency to tackle such problems. The theory is that introducing such transparency to that market will weed out dirty money from the system. But the costs and risks of doing so are enough to make it worth subjecting that theory to some scrutiny.
Part of the system
The new requirements build on existing systems for the registration of land and for UK entities to self-report their Persons with Significant Control (PSC) to Companies House, as well as the increasingly complex requirements under anti-money laundering (AML) and sanctions laws on banks, conveyancers, estate agents and others – gatekeepers for the UK property sector.
The latter category includes requirements to conduct due diligence on customers, and to report discrepancies in the PSC register to Companies House, to report suspicions of money laundering to the National Crime Agency (NCA), and to make reports to the Office for Financial Sanctions Implementation (OFSI) any grounds to suspect someone designated under, or in breach of, sanctions regulations.
In broad terms, the new requirements are expected to prompt more such reports, increasing the amount of intelligence available to UK law enforcement, and/or to discourage launderers and sanctions evaders from attempting to abuse the UK property sector.
Secrets and lies
It is not, of course, an assumption of that plan that a determined launderer or sanctions evader, faced with such requirements, would obligingly place their head in the noose, by stating the true name of a criminal, kleptocrat or oligarch, whose background and wrongdoings could be ascertained by a rudimentary Google search. Rather, the requirements place an additional cost on the launderer to find someone, an individual or an entity, to ‘front’ for them, or perhaps to provide information or evidence truthful or otherwise, that would help reporters, or law enforcement, to expose a discrepancy or a lie, or to follow leads, in combination with other evidence or intelligence, that help build a case for presentation to a court. That, ultimately, could help law enforcement to prosecute people or seek the freezing and forfeiture of assets that represent the proceeds of crime, or are caught by sanctions.
Collateral damage
To set up this convoluted trap for launderers, regrettably, a set of complex obligations has been placed on entities that may not themselves be used to the UK’s often complex provisions. The definitions in the new Act, for instance on beneficial owners and chains of companies, are not easy to navigate, and much will depend on the detail of regulations made under it. The various provisions sometimes sit uneasily alongside each other, with subtly different definitions and thresholds for ownership and control under AML rules, PSC registers and sanctions regulations, meaning that an entity could comply with the new rules but still unwittingly prompt reports to the NCA or OFSI.
With a typical excess of zeal, UK lawmakers have chosen to underpin the obligations of the new scheme with criminal liabilities, which can extend to officers of the entities. While the determined launderer may simply factor this into their existing risks, for legitimate businesses it represents a significant new set of worries and overheads.
The collateral damage extends to the beneficial owners themselves, who will be affected regardless of whether they are, in fact, criminals, kleptocrats, oligarchs, or launderers (the majority, it might cautiously be ventured, may not be). While the world’s villains may be attracted to the UK property market as a lucrative place to store value, they are not alone in that view; nor are they the only people to value financial privacy, especially where owners could be vulnerable to extortion or malicious attacks.
A credible threat?
The other potential drawback of the plan is that the real impact of requiring transparency depends on the enforcement side of the equation, and, crucially, that it be properly resourced. The PSC register has faced some ridicule for the fact that it depends on self-reporting, with next to no system of verification by Companies House; the new register faces a similar challenge.
While reform has been promised, the direction of UK policy in recent years might fairly be characterised as increasing the number of agencies and headlines involved in tackling economic crime and sanctions enforcement, while continuing to spend as little money on it as possible. The results include, notoriously, a glut of reports about suspected laundering made, in diligent compliance (or, sometimes, over-compliance) with AML rules, to the NCA, but which routinely sit unread by anyone.
That raises a distinctly uncomfortable prospect, that the new system may do more harm than good. To the determined launderer, the fact that it gives an appearance of transparency (contributing to the remarkably persistent perception that assets held in the UK are more likely to be ‘clean’), while thanks to under-resourcing, the real prospects of their being seized are slim, arguably represents the best of both worlds. For those with a genuine interest in cleaning up the sector, the real risk is that it represents the opposite.
