The Economic Crime (Transparency and Enforcement) Act 2022 (‘the Act’), is an attempt by the government to reduce the manipulation of the UK’s financial system as a tool for nefarious actors to conduct financial crimes. The obvious political focus of the Act was on holders of significant wealth close to Vladimir Putin and the Russian government, individuals commonly referred to as ‘oligarchs’, although the effects of these changes to legislation have far-reaching consequences for many other individuals and businesses.
One such change is the implementation of the Register of Overseas Entities (the ‘Register’) as part of Companies House reforms, which came into force on 1 August 2022. The Register means that, in short, any overseas entities who want to buy, sell, or transfer property or land in the UK, must register with Companies House and declare who their registrable beneficial owners or managing officers are.
What are the new rules and when do they take effect?
Under the Act, the Registrar of Companies is required to maintain the new Register.
Overseas entities that own property in the UK (freehold estates or a lease granted for a term of more than seven years) are now required to register with Companies House and to identify their beneficial owners.
In England and Wales, the requirements of registration apply to property acquired since 1 January 1999. In Scotland, registration requirements apply to property acquired since 8 December 2014. Overseas entities that currently hold qualifying property have six months from 1 August to register with Companies House. Failure to register is a criminal offence.
The new Register will consist of a list of registered overseas entities and documents delivered by such entities to the Companies House Registrar. As part of their application, overseas entities are required to state that they have complied with a duty to take reasonable steps to identify (and provide information about) their registrable beneficial owners. Provision of false or misleading information in an application is a criminal offence.
The procedure for making registration applications is set out in the Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022.
The Requirements of verification
The specific provisions of the requirements for verification are covered in the
Register of Overseas Entities (Verification and Provision of Information)
Regulations 2022 (SI 2022/725) (the ‘Verification Regulations’), giving specific statutory requirements for this process. Any information that an overseas entity submits to the Companies House Registrar (as part of its registration application) must first be verified. Additionally, a UK-regulated agent must complete verification checks on all beneficial owners and managing officers of an overseas entity before it can be registered. It will then need to provide an agent assurance code and an overseas entity verification checks statement to confirm that it has done this. These persons must be based in the UK and supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. They can be an individual or a corporate entity, such as a financial institution or legal professional.
The challenges for the accountancy sector
The Department for Business, Energy and Industrial Strategy (BEIS) has produced some guidance for those who may undertake verification on behalf of an overseas entity. According to guidance produced by the Law Society: “While the BEIS guidance will be helpful in setting out the government’s perspective towards enforcing the Register, it does not, and cannot, override the specific provisions of the Verification Regulations.” Therefore, the BEIS guidance is non-statutory and must be read in conjunction with the Act and associated regulations.
Given the potential liabilities for incorrectly carrying out verification checks, it is critical for any members seeking to carry out this service for a foreign entity that they fully understand that the client due diligence (CDD) process usually carried out to comply with anti-money laundering regulations is not of the same standard required for verification. Indeed, the BEIS guidance highlights that “there are differences between what’s required under the Money Laundering Regulations (MLRs) by way of client due diligence and what is required by way of verification under the 2022/725 Regulations. As such, a relevant person cannot only do what they would normally do under the MLRs and as set out in related industry guidance. Relevant persons should refer to the Act, the 2022/725 Regulations and this guidance when conducting verification checks.”
BEIS continues that “there is no risk-based approach to verification under the 2022/725 Regulations and so relevant persons must be confident they’ve seen documents and/ or information from reliable, independent sources to verify each piece of relevant information”. This means that there is significant responsibility on the ‘relevant persons’ under the legislation.
Conclusion and caution
ICAEW is concerned about the responsibilities and expectations placed on professional accountants with regards to verification. Any professional accountant who is considering providing verification services should ensure that they fully understand the legislative scheme and requirements; and that they have the relevant skills and expertise, including the resources and ability to verify information and material provided from overseas jurisdictions, and the ability to detect potentially fraudulent documents. They should also ensure that they have appropriate professional indemnity insurance in place.
If a professional accountant undertakes verification and does not carry out the process correctly, then they open themselves up to criminal prosecution, regulatory sanctions, and liability for professional negligence. Due to the challenges of carrying out verification, it is likely that many professional accountancy firms will not routinely offer this service, because satisfying the necessary criteria may be overly onerous and/or risky. Whilst carrying out verification for a long-standing client may be possible, we recommend that members exercise serious caution in considering the establishment of any new client relationships purely for the purposes of providing ROE verification services. The Accountancy AML Supervisors Group (AASG) is assessing the risk associated with this work and will be issuing an AASG risk alert shortly.
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