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28 Mar 2022

The Economic Crime (Transparency and Enforcement) Act 2022 – what do lenders need to know?

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This article explains what actions lenders should be taking as a result of the new Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") – both now and also once the registration regime starts.

Background

The Government has enacted legislation to introduce new measures to try to tackle "illicit finance" in the UK property market. The Act was fast-tracked partly in response to Russia's invasion of Ukraine and became law on 15 March 2022.

Part 1 of the Act (which is the focus of this article) provides for a new Register of Overseas Entities and their beneficial owners at Companies House. This aims to improve the transparency of overseas entities who invest in land in the UK and to assist in the Government's drive to act against sanctioned individuals and their assets.

Although this new register forms part of the new expedited legislation (which also amended and expanded existing legislation relating to sanctions1 and unexplained wealth orders), the creation of a new register of overseas entities and their beneficial owners had, in fact, been under discussion and consultation for some years.2

Key features of the new regime

At a glance, the Act…

  • … creates a new registration requirement: The Act introduces measures to create a registration requirement at Companies House for any "overseas entity" which owns a "qualifying estate" in land in the UK which was purchased on or after 1 January 1999. Overseas entities and trusts (via their trustees) must register and also reveal their "beneficial owners" and Companies House will allocate an "overseas entity ID" number for each entity registered.
  • … prevents current overseas property owners evading the rules by selling their properties before the new regime starts: The Act includes provisions to prevent evasion of the new measures before the Register of Overseas Entities is set up by requiring that any overseas entity entering into a "relevant disposition" of a qualifying estate on or after 28 February 2022 until the end of a transitional period registers pursuant to the Act. A relevant disposition will capture a transfer, a grant of a lease of seven years or more and, crucially for lenders, the grant of security. The transitional period lasts for six months commencing on the date the new registration regime comes into force. There is currently no indication of when the new regime will commence (which will be determined under secondary legislation).
  • …enables restrictions on titles to be imposed at UK land registries, restricting the ability of non-compliant overseas entities to deal with their properties: The Act creates a new duty on the UK's land registries to place restrictions on titles to qualifying estates registered to overseas entities before the end of the transitional period. This will have the practical effect of restricting overseas entities' ability to transfer, let (a lease of more than seven years) or charge their relevant interest unless they have complied with the new law. However, the Act seeks not to penalise secured creditors by permitting dispositions made in exercise of a power of sale or leasing, or by appointed receivers and also dispositions made by other "specified insolvency practitioners in specified circumstances" (the meaning of which will be determined under secondary legislation).
  • ….requires overseas entities to update the relevant information annually: The Act imposes an annual information update obligation on overseas entities and a number of offences for non-compliance, several of which are potentially punishable by fines and imprisonment.

The terms shown in inverted commas above and an analysis of the requirements of the Act in relation to property ownership and information that will need to be provided are covered in more detail in the article issued earlier this month by members of Stephenson Harwood's Real Estate team: "Real Estate 10 Key Questions about how the Economic Crime (Transparency and Enforcement) Act 2022 affects property ownership".

What should lenders do now?

The immediate impact of the Act is tempered pending Companies House's establishment of the new registration regime. However, it is evident that the Government wants to implement the new regime as quickly as possible.

So, what action should lenders take now?

  • Identify affected transactions: Lenders will likely want to look at their portfolios to identify those transactions where an overseas entity has granted security over UK property in support of a loan, or otherwise has overseas ownership. Once the details of the regime (and its commencement date) are established, lenders may also wish to alert affected clients so that these clients can take action to comply with their obligations.
  • Check finance documents: Given the scope of the legislation, lenders will no doubt wish to ensure that relevant finance documents entered into now include obligations on borrowers and other obligors to comply with all their obligations under the Act (or ensure that the documents impose sufficiently wide "compliance with laws" obligations on relevant overseas entities).

What should lenders do when the registration regime starts?

Once the new regime is up and running lenders will want to check the following issues:

  • Require the provision of overseas entity ID numbers as CPs on relevant transactions: A lender funding or taking security over a property owned by an overseas entity will always need to ensure that provision of an overseas entity ID number becomes a condition precedent to drawdown.
  • Require relevant overseas entities to comply with update obligations: Given the annual information update obligations, lenders will also wish to ensure the overseas entity is under an ongoing obligation to comply with the updating requirements, and provide evidence of such compliance (which could be done on a specific basis or, where relevant, perhaps via an annual compliance certificate).
  • Consider placing an obligation on borrowers to ensure registerable leases granted out of the secured property are only granted to overseas entities who comply with the regime: Lenders who are lending against tenanted UK property will likely want to ensure that registerable leases (i.e. leases for a term of seven years or more) can only be granted or assigned to an overseas entity if it has an overseas ID, and with a continuing obligation on the overseas entity to comply with the updating requirements of the regime.

What should overseas entities who have granted, or may wish to grant, security over UK property do?

  • Register before the expiry of the transitional period: The Act has a broad reach and affects any overseas entity owning, acquiring or disposing of UK property. Failure to comply carries criminal liability and will have a devastating effect on the value of a property because, where restrictions are imposed on the title register due to non-compliance with registration obligations, it will not be possible for the overseas entity to deal with its property until it does register. Furthermore, while there is currently no information on when the registration regime will commence, once it is up and running, registration will usually need to be effected within six months. When the time comes this will not be long and overseas entities will want to get prepared as much as they can.
  • Remember that any relevant disposition of UK property from 28 February 2022 will also trigger a registration obligation: Overseas entities will also need to bear in mind that any transfer of, grant of security over or grant of a lease of UK property from 28 February 2022 will trigger an obligation upon them to register by the end of the six month transitional period. Despite the sense of urgency in Government communications regarding the Act, it is not yet certain when the regime (and therefore the six month transitional period) will commence and it is conceivable the regime could take some time to set up. Consequently, it could be easy for an overseas obligor (and its officers) to overlook its registration obligations and, inadvertently, become subject to ongoing fines and criminal liability.

Conclusion

Whilst the Government's immediate desire is undoubtedly to be seen to be acting against oligarchs and their assets, the new Act sits in the wider context of a move towards increased transparency. We have already, for example, seen the introduction of the PSC (person with significant control) register for UK companies and the trust register held by HMRC. While the intended targets of the new regime are clear, the Act will nonetheless have a significant impact on legitimate overseas investors with the introduction of additional reporting obligations which will require close attention to ensure compliance.

The requirements of the Act will continue to evolve with the passing of secondary legislation and, potentially, amendments to the existing legislation.

If you have any questions as to how the Act might affect you or your clients we would be delighted to help. Please contact Archie Campbell or your usual contact at Stephenson Harwood.

 

 

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