A joint committee of the House of Lords and the House of Commons, the principal legislative bodies in the United Kingdom, has released its report following a review of the draft Registration of Overseas Entities Bill.
The Bill sets out the proposed legal basis for a register of beneficial owners (or more accurately persons with significant control) of non-UK legal entities that own real estate in the UK. In broad terms, the impact of the Bill is that any such entity will be required to maintain a register, which will be publicly accessible, showing details of any person with control over that entity (Overseas Register). A similar register already exists for UK entities, the Persons with Significant Control Register (PSC Register) but the Bill broadens the requirement to disclose PSCs to non-UK entities that own UK land. A material difference between the existing PSC Register and the new Overseas Register is that transactions involving an overseas entity buying or selling UK land (including disposals and the grant of long-term leases) will not be permitted unless the registration requirements in the Bill have been complied with. As such, the consequences of non-compliance are potentially serious. Briefings containing further background information about the Bill and its impact can be found here and here.
The Committee’s report is only the start of a process of formal scrutiny of the Bill by Parliament. However, the report contains recommendations for Parliament that are bound to be influential in informing Parliament’s approach when scrutinising the Bill and ultimately in determining the final structure of the legislation.
The key recommendations in the report are:
- The treatment of trusts is under renewed scrutiny. The Committee expressed concern that trusts would fall outside the operation of the Bill. Many trusts are not separate legal entities within the current scope of the Bill and trusts may therefore be used to circumvent the obligation to register contained within the Bill.
- The Government’s current view is that the UK’s implementation of the fifth Anti-Money Laundering Directive (5AMLD) should close this trust loophole. Certain trusts are already obliged to register under the HMRC Trust Registration Service (TRS) which is the Government’s proposed structure for implementing 5AMLD.
- The Committee called on the Government to explain how arrangements for holding land in the UK involving trusts will be addressed, either in the Bill or in the 5AMLD. Parliament will need to consider the Bill and all other measures at the same time to ensure that trusts do not fall between the different regimes.
- The Government may seek to widen the types of trusts which are required to register under the TRS as a way of addressing the issue. This may mean that overseas trusts (including discretionary trusts) holding UK real estate will be included in either the Overseas Register or the TRS. As it stands, the TRS will not be publicly accessible but the Committee has recommended that this is reviewed and that the TRS be publicly accessible.
- The Committee recommended that the Bill and the implementation of the 5AMLD should take place as soon as possible and at the same time, so that a jigsaw of measures can be put in place to ensure that nothing falls between the different regimes.
- It appears that the Overseas Register and the PSC Register will be based on the same set of rules, which is helpful, not least to ensure consistency.
- The Committee expressed concern that the current proposed threshold any person holding more than 25% of the shares or voting rights in a company, could undermine the draft Bill’s aim to capture the true beneficial owners of overseas entities. It has urged the Government seriously to consider the case for lowering the 25% thresholds in the Bill, and also in the PSC regime. If this approach is taken, this would be a significant change to both regimes.
- The Committee was attracted to the idea of civil penalties, particularly if such penalties are easier to enforce than criminal sanctions. Civil penalties could be supplemented with criminal sanctions for non-payment of civil fines.
- The Committee stated that further clarity is needed on the types of entity that will be caught by the Bill and recommended that the Government produce a clearer definition of what non-UK entities are caught by the Bill.
- The Committee recommended a pre-clearance mechanism, including some formal means of adjudication, which confirms whether legal entities are registrable in advance of transactions. There is a concern that disputes about categorisation will be inevitable.
- There is a recognition that the registration process must be quick, for example single purpose vehicles incorporated to acquire property should be registered without any delay. There is clearly a need for additional resources to be provided to Companies House to allow for this.
- As it stands, relevant overseas entities will be required to update the Overseas Register annually. The Committee has recommended that the Bill should also include a specific requirement that overseas entities update the Overseas Register before any dispositions of land are made. This will capture information at the point of transaction; when potential money laundering might occur. In addition, a third party should be able to request enough information to ascertain whether the overseas entity has complied with its duties.
- The Government should ensure that the Overseas Register includes a mechanism allowing users of the register to “flag” suspicious or potentially incorrect information, and that mechanisms are in place to examine this information.
There is little doubt that the Bill will be made law. However, if some or all of the Committee’s recommendations are included, then the legal obligation to register the details of beneficial owners of UK property will be even broader than the current proposals.
If you require further information about anything covered in this briefing note, please contact Anthony Turner, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2019