The problem
It is well-known that there are a substantial number of UK properties which are owned by offshore entities and whose ultimate beneficiaries remain unknown and difficult to trace.
Indeed, the latest version (as downloaded on 10 July 2023) of HM Land Registry’s publicly accessible database of overseas companies that own property in England and Wales shows that 93,430 UK Property Titles are currently registered to overseas companies. 73% (68,037) of those entities are registered in five jurisdictions:
| JERSEY | 21,695 |
| BRITISH VIRGIN ISLANDS | 20,749 |
| GUERNSEY | 12,734 |
| ISLE OF MAN | 10,391 |
| LUXEMBOURG | 2,468 |
Each of the above jurisdictions has less stringent corporate disclosure requirements, particularly regarding beneficial ownership, than the UK. For example, Jersey requires accounts to only be available to shareholders, and all details of beneficial ownership are not currently publicly available (pending an EU consensus on beneficial ownership disclosure standards). The same can be said of the other jurisdictions on this list.
The issues that historical tolerance of such arrangements have brought about are both widely documented and criticised, particularly in light of Russia’s invasion of Ukraine in February 2022.
The solution?
On 1 August 2022, further to heightened public interest, Companies House launched the long awaited Register of Overseas Entities (ROE), framed as an ambitious extension of its existing database to cover overseas entities with property interests in the UK.
The ROE was brought in amongst other reforms by the Economic Crime (Transparency and Enforcement) Act 2022, expedited through Parliament in the wake of Russia’s war in Ukraine. Its key objectives are ostensibly to facilitate the identification of owners behind overseas (or offshore) entities that have interests in the UK and to prevent UK property being used for money laundering purposes and/or other financial crimes.
The requirements dictate that, from 5 September 2022, an overseas entity with a current holding in or intention to purchase a Qualifying Estate (being a freehold property or a leasehold interest granted for a term of seven years or more in the UK) must apply to Companies House for registration on the ROE. ROE registration requires disclosure of beneficial ownership in the following broad circumstances (which align with the existing Person of Significant Control requirements at Companies House):
- Holds, directly or indirectly, more than 25% of the shares in the entity
- Holds, directly or indirectly, more than 25% of the voting rights in the entity
- Holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the entity
- Has the right to exercise, or actually exercises, significant influence or control over the entity.
Failure to register will have the following consequences:
- The overseas entity’s will not be able to register an acquisition or disposition of the Qualifying Estate with the Land Registry
- Where the Qualifying Estate is already held, the overseas entity and its officers in default will have committed a criminal offence punishable by fines (of up to £2,500 per overdue day), imprisonment (of up to two years) or both
- If the overseas entity enters into a transaction in breach of the restriction, it and its directors will have committed a criminal offence punishable by fine, imprisonment (of up to five years) or both.
Limitations?
As financial crime investigators, whilst we welcome the introduction of legislative measures aimed at improving transparency, we remain sceptical that the ROE will sufficiently reform the UK, predominantly because of potential loopholes, including the following:
(i) ROE disclosure of overseas Trustee and Nominee entities as beneficial owners
(ii) Sharing ownership with four or more trusted individuals to circumvent requirements and
(iii) Informal personal nominee arrangements with trusted personal contacts.
Whilst the latter two scenarios listed above are virtually impossible to address from a legislative standpoint, the first is concerning given the ubiquity of offshore Trustee and Nominee entities.
The UK Government published a factsheet on beneficial ownership, as updated on 20 June 2023, addressing public concerns about the three loopholes listed above, stating that:
(i) The ROE regulations deem a legal entity which provides trust services to be “subject to its own disclosure requirements”. The overseas entity must provide information about its ultimate beneficial ownership to Companies House, which is shareable with HMRC and law enforcement agencies. This information is not, however, publicly available.
(ii) Whilst some may deliberately reduce their shareholding below 25% to avoid scrutiny, the ROE’s requirements refer specifically to those who "actually exercise" significant influence or control over the entity (i.e. substance over form). Failure of proper disclosure will place all relevant individuals and companies criminally liable in the UK.
(iii) As above, failure to declare a true beneficial owner is a criminal offence.
To conclude
It remains to be seen whether the ROE will deliver the transparency revolution that it sets out to achieve. It has to be a step in the right direction as long as there is effective enforcement and, hopefully, access provided to the key information when needed.
Whilst the UK Government may posit, as it has done in its factsheet, that the ROE regulations are watertight, questions remain as to whether UK criminal liability is a sufficient deterrent for overseas entities and their controlling individuals, especially those with substantial resources and the very best professional advisers. Clearly loopholes still exist, and they will continue to be exploited.
It is likely and beneficial that this raises the bar as regards the actions of professional advisers when it comes to assisting in transactions involving UK property.
As to Companies House holding overseas entities’ ultimate beneficial ownership details and having the power to share these with law enforcement agencies, this does little to assist initial stage information gathering at the outset of an investigation, especially where speed of asset identification and recovery is vital.
