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:
- a statement (in the prescribed form) confirming whether that entity has one or more “registerable beneficial owners”; and
- 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
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.
Compliance with the Act will generally fall within the scope of a standard compliance with laws undertaking. However, once the transitional period has commenced, lenders are likely to require as a condition precedent to lending evidence that either (i) the application is pending, (ii) the overseas entity is exempt or (iii) that the overseas entity is on the register.
Once the transitional period has completed, there is a greater likelihood that lenders will require actual registration rather than just evidence of application, however this will depend to some extent on how long the process is taking in practice.
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.
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.