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Article: July 2018: Asset Tracing in the UK: Impact of Public Registers of Ownership and New Unexplained Wealth Orders

Business Litigation Reports

Background

The UK government has made a number of recent moves that have major implications for individuals and entities that hold assets in the UK. In March 2018, the government announced plans to establish the world’s first public register of beneficial ownership of non-UK companies that own or buy property in the UK. The government then confirmed, in May 2018, that it also intends to require British Overseas Territories to make their company ownership information currently private public. These upcoming public registers indicate a clear move toward the public outing of beneficial owners, first promised by former Prime Minister, David Cameron, at his anti-corruption summit in 2016, and will undoubtedly bolster the Unexplained Wealth Order (“UWO”) regime introduced in January 2018. Under this regime, law enforcement agencies can apply to the High Court for UWOs to force respondents, located anywhere in the world, to explain how they paid for the asset in question, including property they own in the UK or elsewhere.

These developments will be welcome news to the new Director of the Serious Fraud Office (“SFO”), the UK’s principal investigator and prosecutor of serious corruption, fraud and money laundering. Lisa Osofsky, a former FBI Deputy General Counsel, will take up the post in September 2018 and will be responsible for setting the focus and direction of the SFO. Because of her experience in anti-money laundering and compliance, it is anticipated that she will be keen to use the new tools to target what the government sees as illicit foreign wealth invested in the UK.

Entities and individuals that hold assets in the UK will undoubtedly need to assess the impact of the measures on their portfolios and businesses, including understanding the scope of their obligations and what immediate steps to take to limit any disruptive impact of these new measures.

 

Public Register of Ultimate Beneficial Ownership for Companies That Own or Buy Property in the UK

The UK government has announced plans for a public register of ultimate beneficial ownership of foreign companies that own or buy property in the UK. The UK government is developing legislation for the register, and intends to publish for scrutiny a draft Bill this summer, aiming for the register to go into effect in 2021. The register will be available on the Companies House website for anyone to view at no charge (see https://www.gov.uk/government/organisations/companies-house).

According to the proposal published in April 2017, the UK government intends to prevent overseas entities from buying or selling property in the UK unless they have provided beneficial ownership information for the register. See Department for Business, Energy & Industrial Strategy, A Register of Beneficial Owners of Overseas Companies and Other Legal Entities, (April 2017). It intends to enforce this prohibition through a system of statutory restrictions and notes on the registered titles of applicable properties, as well through criminal penalties.

Entities intending to buy property must apply for a registration number by providing their beneficial ownership information. This registration number will be required to register title to the property. Entities that already own property will be given a one-year compliance or transitional period. They can choose to provide the required information and apply for a registration number, or dispose of the property within the year. Failure to do either will result in a note on the title register of the property, reflecting that the entity is prohibited from transferring title or registering a long lease or a charge over the property unless the entity is fully compliant. For current owners who do not intend to sell, lease, or mortgage their property, such that a note on the registered title would have limited, if any, impact, the UK government has suggested that criminal offenses would be appropriate. Entities that already own property will still need a registration number to register title to any newly purchased property.

The register will also require entities to update their beneficial ownership information. The UK government initially proposed requiring an update every two years, but is considering increasing the frequency of the update in its published draft legislation. Additionally, entities bidding for government contracts will similarly have to provide their beneficial ownership information for the register.

Because this register will be the first of its kind, it is not yet clear how enforcement of the register’s requirements and penalties for noncompliance will operate. But the UK government has made clear in its plans that noncompliance will lead to restricted transactions and perhaps criminal liability. It will also be a criminal offense to make false or misleading statements on the register. Thus, planning ahead is critical, as full compliance requires several steps and familiarity with the nuances of the register’s requirements. At the very least, entities should understand the following obligations:

Information required. The register requires, among other things, certain information about the ultimate beneficial owner, such as details about his or her identity and the nature of his or her control over the company.

Beneficial Owner. The UK government intends to adopt the same definition of “beneficial owner” that is currently used in the UK’s People with Significant Control register. A beneficial owner would be any person that (1) directly or indirectly holds more than 25% of the shares in the company, (2) directly or indirectly holds more than 25% of the voting rights in the company, (3) directly or indirectly holds the power to appoint or remove a majority of the board of directors of the company, (4) has the right to exercise or actually exercises significant influence or control over the company, or (5) has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which meets one or more of conditions (1) to (4).

Ascertaining Beneficial Ownership. The UK government intends to require overseas entities to take reasonable steps to find out who their beneficial owners are, such as by looking at relevant documents like member or shareholder registers and governing documents. To ensure the accuracy of reported information, the UK government will also require that overseas entities actually confirm the information with their beneficial owners before reporting it. To the extent that overseas entities are (1) “unable to get full confirmed information from their beneficial owners despite taking reasonable steps to contact them,” (2) “unable to establish if they have any beneficial owners,” or “(3) “have carried out investigations and concluded that they do not have any beneficial owners as no person meets a condition for control,” the entities may record such a statement for the register. Id. But when entities provide these statements instead of beneficial ownership information, they must also provide information about their managing officers.

Public Register of Company Ownership in British Overseas Territories

On May 1, 2018, the UK government confirmed plans to require the British Overseas Territories, including the British Virgin Islands and the Cayman Islands, to make company ownership information available on public registers, under an amendment to the Sanctions and Anti-Money Laundering Bill. This information is currently private and only accessible by UK law enforcement. The territories have until the end of 2020 to set up the public registers.

These measures have raised concerns to some of the territories. Some individuals and companies who set up entities in the UK overseas territories want their financial information to remain private for legitimate reasons, such as business confidentiality. As a result, public registers may discourage individuals and companies from setting up entities in the UK overseas territories, adversely impacting the territories’ financial sectors. These concerns are compounded by potential issues of constitutional overreaching.

 

Again, affected individuals and companies will want to take steps to understand precisely what information they will be required to report for the register well in advance of the date it becomes operational. Additionally, care should be taken to ensure that reported information is accurate, as providing false information for public registers constitutes a criminal offense. It is important for affected individuals and companies to plan ahead and consider whether they would be comfortable disclosing the information that will be required, or whether it would be worthwhile considering moving assets to an alternative jurisdiction.

Unexplained Wealth Orders
Since January 31, 2018, certain UK law enforcement authorities can apply to the court for a UWO. To issue a UWO, a court must be satisfied that (1) there is reasonable cause to believe that the respondent holds the property, (2) there is reasonable cause to believe that the value of the property is greater than £50,000, and (3) there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property. This power was introduced by the Criminal Finances Act 2017, which amends the Proceeds of Crime Act 2002.

A UWO can be used to target a wide range of people. They may be issued against (1) “Politically Exposed Persons,” defined widely to include a person who is, or has been, entrusted with prominent public functions by an international organization or by a non-EEA State as well as their family members, close associates and others connected; or (2) anyone for whom there are reasonable grounds for suspecting their involvement in a serious crime, or those “connected” with someone who is so suspected. See id. Both the person being served and property may be outside the UK. Moreover, law enforcement may apply for a UWO without notice, so the respondent may not even be informed that the court is hearing the application. See Proceeds of Crime Act 2002, § 362I.

Once issued and served, the respondent must explain, among other things, his or her interest in the property and how he or she paid for it (Proceeds of Crime Act 2002, § 362A). A UWO may also require the respondent to produce documents “in connection with” those disclosures. Id. The enforcement authorities may make copies of these produced documents, and may retain them for as long as necessary in connection with an investigation under Proceeds of Crime Act 2002, § 341. Knowingly or recklessly giving false or misleading information in response to a UWO can expose a person to up to two years imprisonment (Proceeds of Crime Act 2002, § 362E).

Failure to comply with the UWO without reasonable excuse results in a presumption that the property is criminal property subject to confiscation. See Proceeds of Crime Act 2002, § 362C. The burden then shifts to the respondent to prove it is not criminal property. See id. This burden-shifting mechanism makes it easier for the government to confiscate property. Before the UWO regime, the government had the burden of proving that an asset was criminal property before it could be the subject of confiscation proceedings. At the same time that law enforcement applies for a UWO, it may also apply for an interim freezing order over the property at issue. A court may make an interim freezing order if the court considers the order necessary to avoid the risk that a later recovery order may be frustrated (e.g., the respondent disposes of the property before an order can issue for its recovery). Proceeds of Crime Act 2002, § 362J. If an application for a UWO is made without notice, an application for an interim freezing order must also be made without notice. Id.

UK law enforcement agencies have already secured two UWOs against £22 million of property, reportedly linked to a politician from central Asia. The UK Department of Business says that over £135 million of UK property owned by overseas companies is currently under criminal investigation, and the Serious Fraud Office has said that it is considering the use of UWOs in a number of their cases.

As law enforcement authorities and courts apply this newly enacted UWO regime, disputes are likely to arise throughout various stages. For example, disputes could relate to (1) the validity of a UWO and any associated freezing order, (2) allegations of non-compliance or inadequate compliance with the order, (3) the use prosecutors or others can make of the information that the respondent has been forced to hand over, and (4) battles regarding the impact of the freezing orders and prosecutors’ attempts to confiscate the property under proceeds of crime legislation. To the extent these disputes may be on the horizon, quickly seeking legal advice may be critical.

Failure to respond within the allocated time-frame detailed in the UWO will result in the property being presumed to be recoverable for the purposes of confiscation proceedings under the Proceeds Of Crime Act 2002. If a respondent provides false or misleading information in response to a UWO, that will constitute a criminal offense carrying a maximum sentence of two years imprisonment. Given these serious repercussions of not responding or responding with false or misleading information, respondents should carefully consider any response to a UWO, after seeking appropriate legal advice.

Any person who believes their assets may come under scrutiny from UK law enforcement should begin considering how they might respond to a UWO. The response period for a UWO is likely to be short, and therefore leaves the respondent with little time to arrange for the collection and review of any potentially relevant materials, make contact with beneficial owners, mortgagors and so on. Given that the preparation of a response may be time consuming, individuals who may face a UWO should begin gathering information on relevant assets so they are readily able (1) to explain their interest in the property and how they obtained it, and (2) to provide adequate documentation of such explanations if they are so required. Individuals will also want to make sure that they have accurate and reliable records regarding sources of their income and how their income is connected to their assets.

Conclusion
These recent developments in the UK raise understandable concerns for entities and individuals who have assets in the UK and legitimate reasons for preserving the privacy of their asset ownership information. It is critical for these entities and individuals to understand how the new regimes will impact them, and to take preparatory steps, which may include undertaking a review of assets that could potentially fall within the scope of the upcoming requirements or could be targeted by a UWO, to ensure that they can comply swiftly with the obligations imposed upon them. These steps are all the more important if, as is expected, the new Director of the SFO instructs her investigators and prosecutors to focus on tackling what the UK government sees as illicit foreign money in the UK, by making use of a combination of the public registers, UWOs and the various other powers contained within the Proceeds of Crime Act 2002.