FCA1


On 18 January 2018, the Department for Business, Energy & Industrial Strategy announced its intention to launch a world-first register by 2021. The purpose is to reduce money laundering by criminals who target the UK property market. The proposed overseas beneficial ownership register (“the Register”) was first announced at the International Corruption Summit in London in May 2016.

Once launched, the Register will be the world-first public register to require overseas companies that own or buy property in the UK to provide details of their ultimate owners. Consequentially, this will help to reduce the number of criminals using shell companies and other vehicles with disguised or untraceable ownership to buy properties in the UK. Thus making it easier for law enforcement agencies to track criminal funds and take action.

Background

In June 2016, the UK became one of the first countries to introduce a central, publicly accessible, register of beneficial ownership known as the people with significant control register (“the PSC register”).

Since the establishment of the PSC register, all companies incorporated in the UK are required to provide information about their people with significant control (“PSC”) to Companies House along with their annual confirmation statement. Most of the information on the register is publicly available.

The UK Government’s intention is to apply the premise of the PSC register to overseas companies with a focus on the property market which has been a key target for criminals nationwide and internationally for money laundering.

Government's rationale

According to the UK Government, the UK is the number one destination for direct foreign investment in Europe. Evidentially, it is testament to the strength of the economy that numerous overseas companies want to invest and do business in the UK.

However, the Government is concerned about the potential for illegal activity to take place through overseas companies investing in the property sector. Some properties are owned through off-shore companies in order to disguise their true owners. This often makes it difficult for regulators, legitimate businesses and the general public to know who the true owners are. It can be very difficult for law enforcement agencies to carry out effective investigations. It has been reported that more than £180 million worth of property in the UK has been brought under criminal investigation as the suspected proceeds of corruption since 2004.

The Government’s view is that increased transparency in property ownership will make the job of enforcement agencies easier and deter criminals from using the UK to launder money and illicit funds. Greater transparency will also help to foster a better functioning property market.

Scope of the new register

Initially, the Government’s intention was to focus on companies limited by shares. However, further work and consultation revealed that this approach would have significant drawbacks. It has been said that it is unclear from the Land Registry records what type of entity holds title. Also, there is an argument that restricting the register to companies limited by shares will encourage the use of other entities or less opaque vehicles for owning properties in the UK. Consequentially, the Government proposes to include all legal entities that can hold properties or bid on central government procurement contracts in the scope of the new register’s requirements.

Entities that hold properties through certain types of lease arrangements are also on the Government’s radar. Leases over seven years are required to be registered in England and Wales, leases over 20 years are required to be registered in Scotland and leases over 21 years are required to be registered in Northern Ireland. The Government proposes beneficial ownership registration with Companies House for any overseas entities that are leaseholders of property where the lease requires registration and is for more than a 21 year term. The rationale for this is that the Government is attempting to capture leaseholds that are similar to freeholds. For instance, where a premium has been paid for the property up front. These leaseholds tend to be longer in duration, and are prevalent in areas such as London, the South East and cities such as Manchester and Birmingham.

The Government’s position on overseas entities that already own property in the UK when the law comes into force is that they will be given a year to comply with the new register’s requirements. After which a note will be added to an overseas entity’s property titles that will reflect that it is unable to sell, lease or mortgage the property where it is not complying with the new law.

Defining a "beneficial owner"

It is imperative to identify who benefits from the overseas legal entity and who exercises control over it and the asset that it holds. Whilst the Government has considered alternative definitions of “beneficial ownership”, it intends to adopt the existing definition that underpins the UK’s PSC register.

The current definition is outlined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and Part 1 of Schedule 1A to the Companies Act 2006. This states that a person is a PSC if they meet one or more of the following conditions in respect of a UK company:

  1. directly or indirectly holds more than 25% of the shares in the company; or
  2. directly or indirectly holds more than 25% of the voting rights in the company; or
  3. directly or indirectly holds the power to appoint or remove a majority of the board of directors of the company; or
  4. otherwise has the right to exercise or actually exercises significant influence or control over the company; or
  5. has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which meets one or more of conditions (i) to (iv).

It is anticipated that the draft legislation for the register will be published in summer 2018 and brought before Parliament by summer 2019. Whilst it is clear that the Government is using its best endeavours and practices to reduce and combat money laundering, it will need to strike a balance between increasing transparency and not overloading potential investors to the UK with disproportionate administration that deters investment.