The Economic Crime (Transparency and Enforcement) Act 2022 (“Act”) came into force on 15 March 2022. The Act was expedited following Russia’s invasion of Ukraine; the new legislation will allow the Government to take prompt action to impose sanctions and gives them new powers to tackle illicit finance in the UK.
There are 3 parts to the new Act:
- The creation of a register of overseas entities
- Additional provisions in respect of unexplained wealth orders
- Addition provisions in respect of sanctions.
Registration of Overseas Entities
Part 1 of the Act sets up a register of overseas entities, which will include information about their beneficial owners; this has been created to compel overseas entities to register if they own land in the UK. The register will be maintained by Companies House.
An overseas entity means a legal entity that is governed by the law of a country or territory outside the UK. This could be a body corporate, partnership or other entity that is a legal person under the law by which it is governed.
The Act will apply retrospectively, meaning that an overseas entity will need to apply to be on the register as the proprietor of a relevant interest in land if the property was acquired on, or after, 1 January 1999 (England, Wales and Northern Ireland), or 8 December 2014 (Scotland).
Any foreign entity selling property on, or after 28 February 2022, will have to record their details on the register. There will be a 6 month transitional period for overseas entities to comply with the new requirements. The transition period will run from the date that the register comes into force. Failure to register an overseas entity and provide the necessary information to the registrar could result in a daily fine of up to £2,500.
The Act creates further offences, including criminal offences of making a false statement. Penalties for non-compliance with the law could result in large fines, a custodial sentence, and legal restrictions being placed over property to prevent the disposal of such property.
Unexplained Wealth Orders
Unexplained Wealth Orders (“UWO”) enable law enforcement to investigate the origin of property and recover the proceeds of crime. An Order requires the recipient, who is either a politically exposed person (PEP), someone connected to a PEP, or a person reasonably suspected of involvement in, or of being connected to a person involved in, serious crime to explain the origin of assets that appear to be disproportionate to their known lawful income. Since the introduction of UWOs in 2018, only 9 orders have been obtained, in 4 cases. The Act amends the Proceeds of Crime Act 2002 (POCA) and seeks to remove barriers to the use of UWOs.
The key updates are:
1) Responsible Officer
Section 362A POCA is amended to “In a case where the respondent is not an individual, the application may also specify a person who is a responsible officer of the respondent (and a person specified may include a person outside the United Kingdom).”
A Responsible Officer, for these purposes is described as:
a) Any director of the respondent, including any person occupying the position of a director, by whatever name called;
b) Any other manager, secretary or similar officer of the respondent
c) Where the respondent is a partnership, a partner or a member of a partnership;
d) Any person in accordance with whose directions or instructions the board of directors or equivalent body of the respondent are accustomed to act.
e) The amendment to section 362A will widen the number of available targets, allowing a broader scope to investigate property held in complex legal structures, including trusts and offshore structures.
2) Time for Determination
Previously, the enforcement authority had to determine what enforcement or investigatory proceedings, if any, it considered ought to be take in relation to property under an interim freezing order within 60 days of the respondent complying with the UWO. That period may now be extended to allow the authorities additional time to consider material provided in response to the UWO.
The court may extend the determination period if it is so persuaded that the enforcement agency is working diligently and expediently towards making a determination, that further time is needed for the authority to make a determination and that it is reasonable in all circumstances for the period to be determined.
3) Cost Orders
Following a substantial costs order being made against the National Crime Agency, as a result of a failed UWO application, the Government has sought to limit the financial risk to enforcement agencies when applying for UWOs.
Under the Act, the court may make an order for costs against the enforcement agency if:
a) The authority acted unreasonably in making or opposing the application to which the proceedings relate, or in supporting or opposing the making of the order to which the proceedings relate, or
b) The authority acted dishonestly or improperly in the course of the proceedings.
Sanctions are restrictive measures that can be put in place to fulfil a range of purposes. These can include complying with UN and other international obligations, supporting foreign policy and national security objectives, as well as maintaining international peace and security, and preventing terrorism.
Power to impose monetary penalties
The Office for Financial Sanctions Implementation (OFSI) ensures that financial sanctions are properly understood, implemented and enforced in the United Kingdom. As part of its powers, the OFSI can impose a monetary penalty on a person who breaches financial sanctions. Previously, a civil financial penalty could be imposed if the OFSI was satisfied that, on the balance of probabilities:
(a) the person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation, and
(b) the person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation.
The new law removes the ‘balance of probabilities’ test and monetary penalties will now be enforced on a ‘strict liability’ basis, this means that knowledge and intent are no longer relevant when determining whether to issue a penalty. Whilst there will still be a defence to criminal allegations relating to breaches, this will not apply to civil monetary penalties which can be up to £1million or 50% of the estimated value of the funds or resources, whichever is greater.
The change in the test is likely to lead to an increase in penalties being issued for breaches of sanctions.
The OFSI may also publish a report of instances where, it is believed that on the balance of probabilities, a person has breached financial sanctions legislation, but that person has not received a fine – this new power could have a detrimental impact on the reputation of individuals and corporates.
Imposition of Sanctions
Under the new legislation, a two-tier designation system is created to impose sanctions – standard procedure and urgent procedure. This change has been implemented to allow the Government to act quickly to impose sanctions.
Under the Act, there are 3 Conditions to consider when imposing sanctions:
Condition A states that there must be reasonable grounds to suspect that the person is an involved person.
“An involved person” means a person who:
(a) is or has been involved in an activity specified in the regulations,
(b) is owned or controlled directly or indirectly by a person who is or has been so involved,
(c) is acting on behalf of or at the direction of a person who is or has been so involved, or
(d) is a member of, or associated with, a person who is or has been so involved.
Condition B is that the relevant provision applies to a person under the law of the US, the EU, Australia, Canada or other country specified in regulations made by an appropriate Minister. This will allow the UK to adopt the sanctions provided by other countries.
Condition C is that the Minister considers that it is in the public interest to make designations under the urgent procedures.
Under the urgent procedure, the Minister imposing the sanctions can by-pass Condition A if Conditions B and C are both met.
If only Conditions B and C are satisfied, the designation will cease to have effect at the end of a 56 day
The Economic Crime (Transparency and Enforcement) Act 2022 has been a long time coming, aspects of the Act were first proposed in 2016, and as recently as January there were rumours that it has been abandoned altogether. Following the invasion of Ukraine, the Act was accelerated through parliament, it was passed in just 2 weeks from its first reading in the Commons. It does now seem that the Government is committing to crack down on dirty money in the UK by forcing transparency in ownership of assets and of the source of wealth. The Government has stated that these measures form part of a wider package of legislative proposals to tackle criminal finance, these will include reforming Companies House and the introduction of new powers to seize crypto assets more easily.