An act of economic warfare? What to expect from the Economic Crime Act
The economic crime landscape is one that often impacts the work of a forensic accountant. Due to the current atrocities in Ukraine, the passing of the Economic Crime (Transparency and Enforcement) Act in the early hours of Tuesday 15 March was done at pace. The contents of the Act and its implications are likely to have a substantial impact going forward.
Emma Webster explains what the act covers.
Having been hailed by David Davis as an ‘economic warfare bill’, the Act is intended to provide the UK with tools to ‘better identify, investigate and sanction the illicit wealth of those who wish to abuse our open economy’. Expedited to assist worldwide attempts to target Russian wealth, it is of no surprise that the Bill was quickly passed with cross party support. One could therefore be forgiven for thinking the proposed powers are newly conceived. However, for much of the Act, that is not the case.
The Act, split into three parts, covers:
1. the creation of a new register of overseas entities;
2. reform of unexplained wealth orders (UWOs); and
3. the streamlining of the Sanctions Act.
Part One – register of overseas entities
Creation of a new register of overseas entities, requiring overseas companies owning or buying property in the UK to disclose their true owners to Companies House.
It is estimated that approximately £170 billion of UK property is held by overseas entities, however, foreign entities owning such property are not subject to the UK’s Persons with Significant Control (PSC) Register, which came into force for UK companies in 2016. The Act aims to remedy this. Any foreign company selling properties between 28 February 2021 and the full implementation of the register will be required to declare true ownership at the point of sale. For existing ownership, those that acquired land since (a) 1 January 1999 in England and Wales, and (b) since 8 December 2014 in Scotland will also be required to comply. Backed by restrictions on registering or disposing the title of the land until registration has occurred, and sanctions for non-compliance, including fines and custodial sentences of up to five years, the register is intended to assist law enforcement agencies identify and investigate those using UK property to launder money.
Origins
Although appearing to be in direct response to the war in Ukraine and a concerted attack on disguised Russian investment in the UK property market, this proposed register is not a new concept. The Overseas Entities Register was first announced in March 2016, around the same time the PSC Register was introduced. After consultation, a draft Bill was tabled in 2018, but slow progress ensued. Recent events have clearly forced the Government to expedite the legislation.
Early concerns and amendments
Although a welcome move, early concerns have been raised (and in some cases, partially addressed). The Bill initially called for daily fines of £500 for non-compliance. Considering the financial means of the individuals the legislation is intended to target, this was considered by many to be weak. The daily amount has now been set at £500, increasing to a maximum £2,500 per day.
As the Register will be based on existing PSC requirements, there remains the possibility that companies will be able to hide their true owner by claiming that they have no beneficial owner. This is already a problem with the existing PSC Register.
The transitional provisions initially proposed allowed a grace period of 18 months to comply (for existing property ownership), which was reduced to six months after concerns were raised. This continues to allow a reasonable timeframe for disposal, however the Act now requires sales from 28 February 2021 to be registered at the point of sale. This is a positive move but will require Companies House to be sufficiently resourced from the get go. As further widespread reform of Companies House is imminent, there are questions over its current capability and capacity to deal with the new register.
Another change to the Bill is the closing of a loophole which would have allowed the Secretary of State the right to exempt individuals from registration on the basis of ‘the interests of the economic wellbeing of the United Kingdom’. Seen as a widely termed ‘oligarch loophole’, the removal of the exemption has been widely welcomed.
Outlook
Whilst there are questions over the ability of the register to assist in the waging of economic warfare in the short term, the proposed register is likely to make a significant longer term impact.
Part Two – reform of UWOs
Reform aimed at improving the effectiveness of UWOs, particularly in relation to situations involving complex ownership structures.
Changes include:
- the definition of property being expanded to include homes held in trust or by shell companies;
- more time is to be made available to law enforcement to carry out investigations; and
- reforms to the cost rules meaning agencies will no longer be liable for respondents’ costs unless they act dishonestly, unreasonably or improperly.
Why were reforms needed?
UWOs have been around since January 2018 but have been used only nine times in relation to four cases. The early hopes of a strong weapon to improve civil recovery just haven’t materialised. This is largely attributable to the costs (and public embarrassment) associated with failed attempts. In one case, the NCA was left with a bill of £1.5m after a UWO used to seize property assets was successfully challenged. Identifying ownership of assets has also often proved difficult.
Another obstacle has been the requirement that an agency proves the respondent did not have legitimate means with which to acquire the asset. When legitimate wealth is also held by a suspect (which it often is), it is difficult to point to a specific asset and categorically state that it was obtained via illegitimate means.
Outlook
There is a clear political will to make better use of UWOs, and the Act will undoubtedly move some way towards this.
Part Three – streamlining of the Sanctions Act
Reform to expedite sanctioning of oligarchs and businesses associated with the Russian Government and strengthen powers to impose monetary penalties on those who violate sanctions.
The Act introduces an urgent designation process to allow the UK to quickly impose sanctions in respect of entities already subject to sanctions by other specified countries (including the US and EU). This process includes the removal of the statutory test of appropriateness for making such designations. There does, however, remain a requirement to show reasonable grounds to suspect that the person to be designated is ‘an involved person’.
At present the Office of Financial Sanctions Implementation (OFSI) can only impose civil monetary penalties for contravention if the individual / institution knew or had reasonable cause to believe that they were breaching sanctions. This requirement has been removed, bringing the UK more in line with civil enforcement powers in the US.
Potential concerns
Some commentators have expressed concern that the new rules will capture those who make honest mistakes. One industry capable of falling foul is the Fintech banking industry, with many newly established institutions not having sanctions monitoring capabilities in place to meet the new strict liability test.
Outlook
The sanctions proposals are considered significant and a welcome change to what has historically been perceived as a weak record of UK sanctions enforcement. The Act will make it far easier to impose civil fines for non-compliance with obligations by applying strict liability. It is hoped that this will add teeth to the existing regime which has seen OFSI issue only six fines in the six years since it was created.
Shortly following the Act’s Royal Assent on 15 March, the UK Government announced a further 370 sanctions against Russian and Belarusian entities; 51 of which are believed to be oligarchs and their family members, with an estimated worth of £100bn.
Next steps
The Act sets out the first set of measures in a wider package of legislative proposals intended to tackle illicit finance. Next to be addressed by Government in the coming months is the long overdue reforming of Companies House and the introduction of powers to seize crypto assets more easily.
Steps taken to tackle and reduce economic crime are certainly welcome, and the effectiveness of the Act will become clearer in due course. We eagerly await the next set of proposals and are interested to see whether these are delivered at such pace.
