Legislative Developments
The most significant recent legislative development in the UK’s anti-corruption regime has been the Economic Crime (Transparency and Enforcement) Act 2022. This legislation, which came into force in March 2022, introduced a number of reforms intended to bolster the UK’s response to the flow into the UK of assets derived from criminal conduct, in particular corruption. These reforms included the creation of a statutory register for information about the ownership of non-UK companies holding an interest in UK real estate and modifications to the UK’s Unexplained Wealth Order regime, a mechanism enabling law enforcement agencies to obtain information about sources of wealth from those whose assets appear disproportionate to their known income.
The UK government has also published a further piece of proposed legislation, the Economic Crime and Corporate Transparency Bill, which is intended to address the abuse of the UK’s financial system by kleptocrats and other criminals. Its reforms (as envisaged) include changes to corporate registration procedures and the introduction of a lower threshold for corporate criminal liability in respect of fraud. The bill is currently wending its way through parliament and is expected to be made into law in 2023.
Economic Crime (Transparency and Enforcement) Act 2022
Register of Overseas Entities
The UK has been the subject of much criticism in recent years over concerns that it has been too easy for international kleptocrats to invest the proceeds of their crimes in high-end real estate, particularly in London. This criticism was particularly intense in the aftermath of the substantial leaks of corporate information known as the Panama Papers, Paradise Papers, and Pandora Papers. Just one of these leaks revealed that at least £4 billion worth of UK real estate, much of it in exclusive parts of the capital, was owned anonymously through companies registered in secrecy jurisdictions. Investigations tied many properties to politically exposed persons, many from jurisdictions with a high risk of corruption and some of whom had allegedly received bribes.[1]
Specific criticism was levelled at a perceived lacuna in the law that allowed non-UK companies to be less transparent about their ultimate beneficial ownership than UK companies. Although all companies owning real estate in the UK[2] are obliged to register their interest with the Land Registry, the identity of the Ultimate Beneficial Owners (UBOs) of non-UK companies has often remained obscure. The new Economic Crime (Transparency and Enforcement) Act 2022 addresses this issue by imposing on non-UK companies that own an interest in UK real estate a standard of transparency about beneficial ownership that is analogous to the requirements of domestic entities.
1. Threshold for Disclosure
The new requirements are triggered when a non-UK entity holds a “relevant interest in land”. This means either a freehold interest (i.e., where the entity owns the land outright), or a leasehold interest where the term of the lease is more than seven years. The requirements apply to all companies that are not registered in the UK, as well as to non-UK LLPs and partnerships.
2. Disclosure Requirements
UK companies have for many years been required to disclose their “persons with significant control” (PSCs) at Companies House, the UK’s corporate registry.[3] A PSC is an individual or entity holding more than 25% of the shares or voting rights in the company, or the right to appoint or remove the majority of the board of directors, or having the ability to influence or control the company through other means. The beneficial ownership information required from non-UK entities is equivalent to the information required under the PSC regime.
The new legislation now requires a non-UK entity holding a “relevant interest in land” to notify Companies House that:
a. It has identified any registrable beneficial owners and has provided the required information;
b. It does not believe that it has any registrable beneficial owners; or
c. It believes it has registrable beneficial owners, but it cannot provide the necessary information.
The notification must be made by 1 February 2023. It is a criminal offence for a non-UK entity to fail to register where required (and to fail to keep registration information up to date). In addition, a non-UK entity that acquires a relevant interest in UK land after September 2022 will only be able to register that ownership with the Land Registry if it has made the necessary disclosure under the new regime.
Changes to Unexplained Wealth Orders
The UK implemented its Unexplained Wealth Order (UWO) regime in 2017 in response to concerns about the proceeds of corruption and other offences being invested in the UK. Briefly, the UWO mechanism enables UK law enforcement authorities to require a Politically Exposed Person (PEP), or somebody who is suspected of involvement in serious crime, to explain the origin of any assets (minimum combined value of £50,000) that appear to be disproportionate to that person’s known lawfully obtained income.
The UWO is not itself a recovery mechanism, but answers given by a respondent may be used in subsequent civil recovery proceedings under the Proceeds of Crime Act 2002. In addition, where a respondent fails to respond to a UWO, that provides a basis for the bringing of such recovery proceedings.
Early use of UWOs by law enforcement authorities led to a number of successful court challenges, most notably in a widely reported case from 2020 that saw several UWOs discharged and a substantial costs order against the National Crime Agency.[4] The reforms brought about by recent legislation are intended to make the authorities’ use of UWOs easier and more effective.
The reforms include the following:
a. A UWO may now require a ‘specified responsible officer’ of the respondent (this includes directors, officers, and managers) to respond to the UWO.
b. Where a court discharges a UWO at the request of a respondent, the latter will be awarded costs only if the relevant law enforcement agency acted unreasonably, dishonestly, or improperly in connection with the UWO.
c. Interim freezing orders granted alongside UWOs may now last up to a maximum of 186 days (during which time the agency must determine what if any further investigation or enforcement it will carry out).
d. The UK government must now publish an annual report setting out the number of UWOs applied for and the number granted by the courts.
Economic Crime and Corporate Transparency Bill Reforms
As mentioned above, the Economic Crime and Corporate Transparency Bill is currently going through the legislative process and if passed in its current form would include a number of changes to the UK’s anti-corruption regime, two of which are summarized here.
1. Changes to Corporate Registration Procedures
The new law will introduce a number of reforms in relation to the role of Companies House as part of its aim of improving corporate transparency in the UK.
The bill will create a mandatory identity verification process for all new and existing registered company directors and PSCs (as defined above). This process may be carried out directly with Companies House, or alternatively through an authorized third-party service provider. This reform is intended to “improve the accuracy of Companies House data, to support business decisions and law enforcement investigations.”[5]
Companies House will also be given more powers to check, remove, or decline information submitted to, or already on, the companies register. This is part of the UK government’s stated wish to “promote and maintain the integrity of the register and help Companies House bear down on those who abuse corporate structures to perpetrate economic crime.”
In addition, the bill will provide Companies House with enhanced investigation and enforcement powers, including the ability to share information proactively with law enforcement agencies where there is evidence of unusual, suspicious, or anomalous corporate filings.
2. Corporate Offence of Failure to Prevent Fraud
It has been reported that a new provision will be inserted into the bill that will make it an offence for companies to “fail to prevent” fraud by their employees.[6] “Failure to prevent” offences were first introduced in the UK in the Bribery Act 2010. Instead of the prosecution being required to prove corporate liability to the usual standard (regarded as a high bar, involving the identification of misconduct by a so-called “directing mind and will”), companies could instead be found guilty of criminal offences on a “strict liability” basis. This means the prosecution is merely required to demonstrate that a person associated with the company (such as an employee, agent, or subsidiary) paid a bribe intending to win or retain business for the company.[7] Liability is subject to a defence of “adequate procedures”, if the company is able to show that it implemented an appropriate anti-bribery program.
The use of “failure to prevent” offences as a means to reform the current approach to corporate criminal liability in the UK has been the subject of much discussion, as set out in more detail in Chapter Ten. The details of the proposed new offence have not been made clear (nor has it even been confirmed that the provision will be added), but the impact of the Bribery Act 2010 on UK businesses suggests that any extension would be of real significance.
Footnotes
[2] For the sake of simplicity, references throughout are to the UK, although the law summarized may apply only in England and Wales; slightly different rules apply in Scotland and Northern Ireland.
[4] National Crime Agency v Baker [2020] EWHC 822 (Admin)