The new register of overseas entities: key points for lenders

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Under the new Economic Crime (Transparency and Enforcement) Act 2022 (the Act), the government is introducing a new Register of Overseas Entities (the Register).

Overseas entities which own real estate in the UK will be required to disclose information relating to themselves and their “beneficial owners”. The Register is expected to take a similar form to the current Persons of Significant Control (PSC) requirements however it will not be entirely the same and there are the additional considerations relating to real estate.

The overriding purpose of the Act is to promote disclosure of information relating to overseas entities and their beneficial owners as a method of tackling money laundering. The Register has been in the pipeline for a number of years but has come increasingly under the spotlight as a result of sanctions against Russia and certain Russian individuals.

How does the Act operate?

The Act applies only to overseas entities having an interest in land in the UK.

The requirement for registration will be brought in over a 6-month transitional period. This transitional period has yet to begin and will require the publication of further regulations.

An overseas entity having an interest in land in the UK must apply for registration if it receives a notice to register from the Registrar of Companies (the Registrar). The overseas entity must register within 6 months of the date of the notice.

When registering itself, the overseas entity must deliver:

  1. a statement (in the prescribed form) confirming whether that entity has one or more “registerable beneficial owners”; and
  2. information setting out details relating to that entity and each beneficial owner. 

Furthermore, if the overseas entity has made a relevant disposition of land at any time on or after 28 February 2022, it must include details of that disposition. If it has not made a disposition it needs to include a statement to that effect. The definition of “disposition” under the Act captures both transfers of land and registration of security.

Once registered, the Registrar will allocate an overseas entity ID to the overseas entity.

A registered overseas entity is also required to update the Register annually although if there has been no change then this can be by way of a confirmation of information previously provided

Beneficial owners

The meaning of a beneficial owner is set out in the Act and closely follows the thresholds in the existing PSC regime, although it is not quite the same.  

It includes an individual or entity which, in relation to the relevant overseas entity or other entity:

  • Ownership of shares: holds, directly or indirectly, more than 25% of the shares;
  • Voting rights: holds, directly or indirectly, more than 25% of the voting rights;
  • Right to appoint or remove directors: holds the right, directly or indirectly, to appoint or remove the majority of the board of directors; or
  • Significant influence or control: has the right to exercise, or actually exercises, significant influence or control.

There are additional provisions relating to trusts. 

When ascertaining the need to be registered as a beneficial owner, there is a 'look through' requirement similar to that under the PSC regime but it is not identical.

Share charges

Of particular interest to lenders is that the Act has specific provisions for the treatment of shares held by way of security. In that situation, the shares will be treated as held by the person who grants the security (as opposed to the security holder) provided that:

  • where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with that person’s instructions, and
  • where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in that person’s interests.

This mirrors the equivalent test under the PSC regime and so share charges have, for a number of years, commonly been drafted to take this into account.

Title register restriction

The Act introduces a new Schedule 4A to the Land Registration Act 2002. The Chief Land Registrar must enter a restriction on the title register where an overseas entity is or has been from 1 January 1999 the registered proprietor of freehold or leasehold land in the UK.

That restriction will prohibit the registration of any disposition of land owned by an overseas entity that should be registered as an overseas entity but is not. This would include the registration of a legal charge granted by that entity over the land.

Exceptions to the prohibition on dispositions

There are exceptions to the prohibition on the registration of dispositions and these include:

  • where the registration is made under a contract entered into before the entity became entitled to be registered as an overseas entity;
  • where the disposition is made in the exercise of the power of sale or leasing in accordance with a registered charge; and 
  • dispositions by insolvency practitioners in specified circumstances.

Lender requirements

Compliance with the Act will generally fall within the scope of a standard compliance with laws undertaking although, in some circumstances, specific representations and undertakings addressing this are likely. However, once the transitional period has commenced, lenders are likely to require as a condition precedent to lending evidence that the overseas entity is on the register.

Lenders may also wish to include an information delivery undertaking of evidence of annual renewal however, pending further guidance, it's unclear what form evidence of compliance with annual confirmations would take.

Failure to comply

Failing to register or update the Register annually is a criminal offence:

  • Failure to comply with a notice to register is an offence committed by (i) the overseas entity (ii) every officer who is in default and is capable of attracting a fine or imprisonment of up to 12 months.
  • Failure to comply with the duty to update the register annually is also an offence committed by (i) the overseas entity (ii) every officer who is in default and is capable of attracting a fine of up to £2,500.
  • Making a registrable disposition in breach of the new restriction is an offence committed by (i) the overseas entity (ii) every officer who is in default and is capable of attracting a fine or imprisonment of up to 5 years. 

It is, however, noteworthy that failure to comply will not affect the validity of a disposal made in breach of the new legislation, however given the application of the restrictions on title it seems unlikely this would occur in practice.

It is also worth noting that offences can also be committed by beneficial owners for failing to comply with certain notices requiring information for the purposes of identifying beneficial owners.

Further guidance

The Act will increase transparency and disclosure relating to overseas entities, placing greater obligations on the officers and beneficial owners of overseas entities. Ultimately, in practice, for lenders it is likely to lead to additional CP deliverables and additional compliance undertakings.

The details of how this will work in practice and how long registrations will take will become clearer as further guidance about implementation (both by HMLR and Companies House) is issued.

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