This article looks at the recent report issued by the Joint Committee on the Draft Registration of Overseas Entities Bill.
On 20 May 2019 the Joint Committee on the Draft Registration of Overseas Entities Bill (the committee) issued its report on the content of the Bill.
The Bill was first published on 23 July 2018 and a summary of the Bill’s key provisions can be found here. By introducing a publicly accessible register of beneficial owners of overseas entities linked to UK property ownership the Bill "aims to increase the transparency of information about who really owns UK land". The committee’s task was to examine whether the draft Bill is likely to achieve this aim. Tackling corruption is a key objective for the Bill and the committee emphasises that the report considers the Bill in the "context of complementary anti-money laundering measures". The report is a detailed document which provides pre-legislative scrutiny in respect of the draft Bill and indicates that the Government remains on track to introduce the Register by 2021. The committee’s overall conclusion is that the "draft legislation is timely, worthwhile, and, in large part, well drafted". However, the committee chairman notes "there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation" and concerns are raised in relation to insufficient verification checks to identify those submitting false information. Some further points of note from the report can be found below:
- Addressing wider issues the report notes at paragraph 17 that "[w]hile it is not the overt intention of the draft Bill, the deterrents that the legislation will give to illegitimate foreign owners may bring about the incidental benefit of decreasing under-occupation."
- In relation to the People with Significant Control (PSC) register the report notes "the PSC register can offer many instructive lessons for the Register of Overseas Entities. The Government will also need to ensure that the requirements placed on practitioners by the two registers complement, rather than contradict, each other."
- In the context of the Bill as a part of a set of complementary anti-money laundering measures, the report refers to the "anti money laundering jigsaw" of which the Bill forms part:
- The report highlights the need for a clear and authoritative definition of "overseas entity". The current definition is "a legal entity that is governed by the law of a country or territory outside the United Kingdom". The report notes that the description of “legal entity” should "put the definition of such a pivotal term beyond any possible doubt".
- The report highlights the need for some form of "pre-clearance mechanism" and dispute resolution procedure to determine whether legal entities are registrable. A fast track registration service is also recommended for circumstances where SPVs are incorporated "only days in advance of a transaction" and the report recommends the Government provides Companies House with sufficient resources to meet this challenge. Parliamentary scrutiny for exemptions and a need for "true equivalence" when an overseas entity has registered sufficient information in another country are also recommended.
- The potential for trusts to operate as a significant loophole in relation to the legislation was identified as a concern. The report notes "this possible loophole is worrying, and, to allay these concerns, the Government should set out in detail in its response to this report how it intends to counteract this possibility". As part of its report the committee recommends the HMRC Trust Registration Service (TRS) be publicly accessible, noting also that the Government intends to widen the scope of the TRS in order to transpose the Fifth Anti-Money Laundering Directive (5AMLD) into UK law (with an assurance given to the committee that this will take place even in the event of a no deal Brexit). The Government’s position is this will aim to close such loopholes. The committee calls on the Government "to explain which arrangements for holding land in the UK involving trusts will be covered by the draft Bill, and which by implementation of 5AMLD". The report acknowledges trusts should not be required to register twice, but the committee therefore invites the Government "to give serious consideration to implementing the provisions in this draft Bill at the same time as 5AMLD, and to ensure that charitable institutions are covered by one of the two frameworks".
- In the draft Bill a "beneficial owner" includes a beneficial owner who holds more than 25 per cent of the shares or voting rights in an overseas entity owning UK land. Concerns were raised by witnesses to the committee that this threshold could be an easily avoidable loophole. In response to this point and whether this could be changed, the report notes the Government minister’s comment “We can play around with the thresholds.” In paragraph 103 of the report the committee recommends lowering the threshold. It goes on to note that the PSC register thresholds should mirror the Register of Overseas Entities.
- A beneficial owner also includes those who have the right to exercise, or actually exercise, "significant influence or control" over an entity, and the committee recommends that the Government should include within the Bill a requirement for the Secretary of State to produce guidance on interpreting the meaning of “significant influence or control” for the purposes of the legislation (and again that this should reflect the PSC regime).
- In relation to updates, going further than the draft Bill, the committee recommends that "in addition to the annual update requirement, the Bill should include a specific requirement on the overseas entity to update the Register before any disposition is made. This will capture information at the point of transaction, where any potential money laundering might occur. In addition, a third party should be able to request enough information to ascertain whether the overseas entity had complied with its duty." The report does not recommend "event driven" updating, noting this may adversely affect third parties, given the consequences for a third party of transacting with a non-compliant party who may not be aware that an "event" requiring an update had occurred.
- Verification checks in relation to the Register were perhaps the biggest weakness identified by the committee. The report notes at paragraph 160 that it "is regrettable that, as currently conceived, the proposed Register of Overseas Entities will have insufficient verification checks to deter criminals who wish to submit false information. It therefore seriously risks failing in its central policy aim: to provide a reliable and transparent record of the beneficial ownership information of overseas entities investing in the UK property market." The report recommends the Government establish "workable verification mechanisms". Reform of the role of Companies House was encouraged to allow it to conduct checks on the veracity of the information held (together with the provision of resources to allow it to do so). However, it was also suggested by the committee that regulated professionals may be able to play a role in verifying information, with costs estimated at just under £50 per entity. Those representing regulated bodies rejected this low cost estimate and the report recommends at para 176 "that the Government should explore the viability of requiring regulated professionals to verify beneficial ownership information submitted to the Register."
- In terms of the enforcement regime (which includes criminal sanctions, adding a restriction to the registered title of property owned by an overseas entity and preventing registration of transactions where an overseas entity has not complied with the regime) the report discusses removing the retrospective time limits on land which may be subject to a restriction. Currently in England the restriction will be entered on existing titles where the overseas entity became the registered proprietor pursuant to an application made on or after 01 January 1999. The report also recognises the potential injustice to third parties who may be unable to register a transaction where the overseas entity selling the property was not compliant with the registration requirements at the time of the sale. There is currently no "appeal" process where this situation has arisen. The Joint Committee on Human Rights (JCHR) recommends the inclusion of a power to disapply or appeal the effect of the prohibitions placed on property "to ensure compliance with the ECHR". The report at paragraph 205 notes "[w]e therefore welcome the consideration that is being given to a possible power to disapply the effects of restrictions on registration." Concern was also raised as to whether an inaccurate update would provide protection for a third party; the view of the committee is this is not sufficiently clear and the Government should clarify this position. In terms of enforcement the committee also recommended "that the Government should introduce civil penalties and explore with the devolved administrations the possibility of enforcement against land of any criminal fines imposed under the Bill".
- A list of possible loopholes in the draft bill is contained at appendix 5 of the report.
The Government has noted it is considering the committee’s recommendations and will publish a response in due course. It is also worth noting that on 05 May 2019, BEIS published a consultation on its proposals to strengthen the UK’s company registration framework at Companies House. Further details can be found here
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.