Registration of overseas entities

Article Experience

The publication of the ‘Pandora Papers’ has led to an increased focus on the transparency of the ownership of land in the UK and calls for the ‘Registration of Overseas Entities Bill’ to be brought before Parliament without further delay.

Synopsis

While they are required to be identified by those acting for them, there is currently no requirement for beneficial owners of UK land to be publicly registered. The draft Registration of Overseas Entities Bill would introduce a new public register of beneficial owners of non-UK entities owning UK land, similar to the PSC regime that applies to UK companies.

What is the background to the Registration of Overseas Entities Bill?

The proposal for a register of overseas owners of land in the UK was first announced following the London Anti-Corruption Summit in May 2016. It sought to build on the ‘persons with significant control’ (PSC) register that was introduced for UK companies in April 2016.

However, since the initial announcement progress on a register has been slow. A draft bill was published by the Department for Business, Energy & Industrial Strategy in July 2018. At that time it was anticipated that the register would be operational in 2021, but there has been little progress since.

this register is intended as an aid to transactions and therefore seeks only to identify legal owners

What are the current registration requirements for land?

Since 1862 the Land Registry has maintained a register of the legal owners of property in England and Wales and since 1990 it has been compulsory to register land on sale (and other ‘trigger’ events). However, this register is intended as an aid to transactions and therefore seeks only to identify legal owners, able to deliver title to the land, not the beneficial owners who are of increasing interest to governments, tax authorities and the press. In addition, 14% of the land in England and Wales remains unregistered. A similar register, the General Register of Sasines, has existed in Scotland since 1617 (although this is being replaced by the Land Register of Scotland).

What requirements are there to identify beneficial owners currently?

Currently there is no public register of beneficial owners of land in the UK. However, under the 5th Anti-money laundering directive, solicitors and conveyancers transacting in land are required to identify the beneficial owners of their clients and to understand the source of their wealth and the funds used for a transaction. While this information will be recorded and retained and can be requested by the relevant authorities, it does not need to be registered.

There is also no requirement to identify the other party to the transaction, so the seller need not identify the buyer and vica versa (relying on the other party’s professional advisor to have done so). Some jurisdictions do have these requirements. For example, an entity managed by a service provider regulated in Jersey selling land (in the UK or elsewhere) is required to identify the beneficial owner and source of funds of the purchaser.

What does the Registration of Overseas Entities Bill propose?

The Bill establishes a framework for the registrar of companies for England and Wales to establish a register of overseas entities.

All overseas entities that own, or wish to purchase, land in the UK will be required to have registered before they are able to register their title or dispose of the land. This will place a practical bar to dealing with UK land on any company not having complied (at least nominally) with the registration requirements.

For existing owners, there will be a transitional period of 18 months from the date the law comes into force for the overseas entity to register as such (or dispose of the land). Failure to register within the 18-month window will be an offence committed by the overseas entity and every officer of that entity who is in default. The maximum penalty for the offence is imprisonment of up to two years plus a fine.

There will be a new requirement for the Land Registry to enter a restriction on the title of land owned by an overseas entity, so that dispositions of the land at a time when the overseas entity is not registered cannot be completed by registration at the Land Registry.

Once registered, an entity will be allocated an overseas entity ID by the registrar.

Within 14 days of each anniversary of the overseas entity’s registration, the entity must deliver to the registrar a statement updating or confirming the details required to be registered (for which, see below). If the overseas entity delivers this statement on an earlier date than required, then its next statement will be required within 14 days of the anniversary of that earlier date. Once again, failure to comply with this duty is an offence committed by the entity and every officer of the entity who is in default, although the penalties for this offence will not extend to imprisonment.

Who must be registered?

Five categories of person must be registered as beneficial owners, which closely mirror the PSC requirements for UK companies. These are:

  1. A person who holds, directly or indirectly, more than 25% of the shares in the overseas entity.

  2. A person who holds, directly or indirectly, more than 25% of the voting rights in the overseas entity.

  3. A person who holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity.

  4. A person who has the right to exercise, or actually exercises, significant influence or control over the overseas entity.

  5. Where the trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such), a person who has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

What must be disclosed?

The information which must be provided about beneficial owners will include their name, date of birth and nationality, usual residential address, service address and the date on which the individual became a registrable beneficial owner (although the date of birth and residential address will not be made publicly available).

If an overseas entity has no reasonable cause to believe that it has any registrable beneficial owners, then information about each managing officer of the entity must be provided instead.

Examples

An overseas company (A) owns UK land. 100% of the shares of A are held by another overseas company (B), whose shares are held 15% by Person X and 85% by Person Y. Person Y would be registrable under both tests 1 and 2 as holding indirectly more than 25% of the shares and voting rights in A. Person X would not be registrable.

An overseas company © owns UK land. No person holds directly or indirectly more than 25% of the shares or voting rights in C. However, Person Z, who is not a member of the board, consistently directs the decision-making of a significant section of the board, who almost always follow her recommendations. Person Z would be registrable under test 4.

Where does this leave us?

Given the obstacles to land transactions and significant criminal penalties which the regime will impose, the new register is likely to provide significant insight into the foreign ownership of UK land and will no doubt be a useful tool in countering money laundering and other criminal activities.

However, as with any register, it will only be as useful as the information recorded on it. In its review of the impact of the PSC register for companies the Department for Business, Energy & Industrial Strategy noted that:

the new register is likely to provide significant insight into the foreign ownership of UK land

“Most Law Enforcement Organisations did not think that the PSC register has had any impact on crime prevention. It was felt that individuals’ intent on committing crime would find ways around the system. For example, conceal [sic] their identity by enlisting the services of a proxy, listing corporate entities as PSCs or simply claiming that the business has no PSCs. “

In addition a number of respondents to the review did not feel that the PSC register was a reliable source of information.

With over 4 million companies registered in England and Wales, the registrar can perhaps be forgiven for being somewhat overwhelmed by the task of ensuring compliance, but with the Land Registry recording a mere 95,000 properties owned by overseas companies there is perhaps scope for a more activist enforcement.

What happens if I don’t register?

The practical consequences of failing to register will be that the overseas entity will be unable to acquire legal title to land in the UK and, where it is already registered as legal title holder, it will be unable legally to sell, lease or charge the land, since any buyer, tenant or mortgagee would be unable to register the disposition.

These practical consequences are eclipsed however by the severity of the criminal sanctions. In addition to those offences mentioned above, it will be an offence for an overseas entity to dispose of land in breach of its requirement to be registered or a restriction on the title. This offence will be committed by the overseas entity and every officer of that entity who is in default with a maximum penalty of imprisonment of up to five years plus a fine.

Additional criminal sanctions are provided for delivering or causing to be delivered to the registrar any document that is misleading, false or deceptive in a material detail and for failure by an overseas entity to comply with a notice issued by the Secretary of State that it must register.

What should I do now?

For now, there are no steps which officers or owners of overseas entities holding UK land can take to register as such, as the law is not yet in force. However, you may consider applying the five tests set out above now in relation to any overseas entities holding UK land to which your or your client is connected in order to determine in advance which details you will need to gather in order to register the overseas entity once the obligation to do so takes effect.

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