On 14 March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (“the Act”) became law, following substantial (61) amendments made by the House of Lords. The Government fast tracked this legislation in response to the Russian invasion of Ukraine. We take a look at some of the key considerations for accountants.
The Act amends the Sanctions and Anti-Money Laundering Act 2018. The most immediate impact of the legislative changes will be to enable the Government to impose sanctions on a wider range of persons including by aligning the designation of individuals and groups by the UK, more rapidly with designations made by the US, EU, Canada and Australia.
The Government will be required to introduce regulations specifying both a standard procedure and an urgent procedure for making designations.
Designation of individuals by name
Under the standard procedure, before making a designation, the Minister will still be required to have reasonable grounds to suspect that an individual is an “involved person “, i.e., involved in (or owned or controlled by/ acting on behalf of/ associated with persons involved in) specified activity which merits the making of a designation.
However, the requirement for the Minister to consider issues of proportionality (having regard to the purpose of the legislation and the effect of designation on an individual), before making the designation, has been removed.
Under the urgent procedure, the Minister does not need to have reasonable grounds for suspicion of involvement. Instead, in broad terms, the Government can make an urgent designation where:
- an individual has been subject to legal sanctions (or equivalent legal provisions) in the US, EU, Australia and Canada (or any other country specified in the regulations); and
- the Minister making the designation considers that it is in the public interest to do so.
The Minister will be required to set out his justification in relation to the public interest test when certifying the designation.
Under the Urgent procedure, the designation will cease to have effect at the end of the period of 56 days (beginning with the day following the designation), unless
- the Minister now has reasonable grounds to believe that the individual is an “involved person”; or
- the individual remains subject to the overseas legal provision and the Minister remains satisfied that the public interest requires the designation to remain in place.
Where the initial designation has been continued on the grounds that the individual remains subject to the overseas sanctions and the public interest merits the continued designation, this second designation will cease to have effect at the end of a further period of 56 days, unless the Minister certifies within the period that he now has reasonable grounds to believe that the individual is an “involved person”.
Designation by individuals by description
The Act introduces a similar urgent procedure for group designations. The Minister can designate persons of a specified description who have been sanctioned (or made subject to equivalent legal provisions) in the US, EU, Australia, Canada (or any other country specified in Regulations); and if the Minister considers that it is in the public interest to do so. The same time limits (two periods of 56 days) apply.
Most significantly, s.54(3) of the Act introduces a new strict liability test in respect of sanctions breaches.
This will replace the current requirement (set out in s.146 of the Policing and Crime Act 2017) for OFSI to be satisfied, on the balance of probabilities, that the person ‘knew’ or had ‘reasonable cause to suspect’ that their conduct breached a financial sanction or that they had failed to comply with their obligations under the regime.
OFSI will still be required to determine whether on the balance of probabilities, a breach or failure to comply with an obligation under sanctions legislation has occurred.
Review of a decision to impose sanctions will no longer be undertaken by the Minister personally (s.55).
S.56 of the Act also extends the “name and shame” powers for OFSI, enabling the publication of reports in cases where OFSI is satisfied on the balance of probabilities that a person has breached a prohibition or failed to comply with the sanctions regime.
This power to publish reports now applies even where OFSI has not imposed a fine.
The combination of strict liability and name and shame provisions, poses a heightened reputational risk to the profession.
Register of Overseas Entities
S.3 of the act establishes a new register which is to be maintained by Companies House (“CH”).
Overseas entities owning property in the UK will be required to register with CH and to identify its beneficial owners.
For property in England and Wales, the requirements of registration will apply to property acquired since 1 January 1999 (Part 2 of Schedule 3). For property in Scotland, it will apply to property acquired since 8 December 2014 (Paragraph 9 of Schedule 4).
The new register will consist of a list of registered overseas entities and documents delivered by such entities to the CH Registrar.
As part of their application, overseas entities will be required to state that they have complied with a duty to take reasonable steps to identify (and provide information about) their registrable beneficial owners (ss. 4 and 12).
Provision of false or misleading information in an application will be a criminal offence (s.32).
By s.7, overseas entities will be subject to an annual updating duty (within 14 days of the updating period) and failure by the entity (or its officers) to comply with this duty will also be a criminal offence, punishable by daily fines of up to £2,500 (s.8).
S.27 provides only limited circumstances in which the CH Registrar can “resolve inconsistencies in the register.” This section applies where the inconsistencies arise from documents delivered to CH, rather than from any other source. However, the Act provides a power for the Secretary of State to make supplementary regulations about verification of information on the new register; and applications by the CH Registrar to make an application to rectify the register (including in relation to material that is factually inaccurate or derived from forgery).
The register will be available for public inspection but certain personal information about individuals (such as their date of birth and residential address) and information about trusts will not be made public (ss.21 to 25).
There will be a 6-month transition period between the Act coming into force and the requirement for overseas entities to be registered.
However, section 41 of the Act includes a requirement for any overseas entity to confirm that it has not disposed of any property since 28 February 2022 (the date the draft legislation was first introduced into Parliament) and the date of application to be included in the register; or if it has disposed of property, to provide specified information about its beneficial ownership.
Failure to comply with this requirement will be a criminal offence.
Unexplained Wealth Orders
The Act makes changes to the Unexplained Wealth Orders (“UWO”) regime established by the Proceeds of Crime Act 2002.
Property held in trust and offshore is now within scope. By ss.45 to 46, in relation to property that has been held via offshore or trust structures, UWOs can be issued to any of a corporate respondent’s ‘responsible officers’, including its directors, board members, managers and trustees (or partners where the body is a partnership).
Ss.47 and 48 introduce a further ground for the making of an UWO. In addition to the current test (the respondent’s income being insufficient in relation to the value of the property), an order can now be made on the ground that “the property has been obtained through unlawful conduct.”
Ss. 52 and 53 of the Act provide protection for law enforcement agencies against potentially huge legal costs (expenses in Scotland) in proceedings relating to UWOs, save where the enforcement body has acted unreasonably, dishonestly or improperly in those proceedings.
Ss.49 and 50 of the Act also provides a power for the High Court (Court of Session in Scotland) to extend the period for an interim freezing order to remain in place, pending determination of an application for a UWO.
By s.51, the Secretary of State must publish an annual report in Parliament which sets out the number of UWO applications made by law enforcement agencies and granted by the Court.
A further Economic Crime Bill
During the debate in the House of Lords, peers highlighted the need for more resources to ensure that Companies House can be more effective in verifying the data held on its registers and that law enforcement agencies are able to leverage their powers under the UWO regime and to increase the number of applications made significantly.
In response, the Government indicated that some of these matters are likely to be addressed in a second Economic Crime Bill which will be introduced in the next session of Parliament.
In the meantime, the Government will provide an update on the progress in implementing the new legislation within 6 weeks.
ICAEW is pleased to note that a draft provision which would have allowed individuals to be exempted from requirements relating to the new register-if the Secretary of State considered that to do so would be in the economic interests of the UK- were removed before the Bill became law.
The transition period specified in the Act is 6 months. This is a reduction from the 18 months proposed in the draft Bill. However, ICAEW’s view was that 3 months would have been a sufficient transition period.
ICAEW’s concerns about the lack of any requirement to update the Register of Overseas Entities within 14 days of a significant event have not been addressed in the Act.
ICAEW welcomes measures to improve transparency. However, ICAEW notes that while the new register will provide greater clarity about the beneficial owners of overseas entities that own property in the UK, it will not necessarily reveal the actual beneficial owners of the UK properties themselves.
ICAEW’s view is that the effectiveness of the Register of Overseas Entities will very much depend on the resources available to CH and the implementation of wider reforms to CH generally.
Please note, this content is information and not legal advice. Members are advised to seek legal advice tailored to their own circumstances.
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