Register of Overseas Entities – one month since the deadline and thousands still face penalties from failure to register
The Economic Crime (Transparency and Enforcement) Act 2022 ("the Act") enacted in March 2022 brought into force the register of overseas entities on 1 August 2022. Companies House holds and manages the new register which was introduced to provide greater transparency around UK land ownership. The transitional period ended on 31 January 2023, and as at 3 March 2023, 26,481 out of an estimated 32,440 have registered. Thousands of companies are still to register over a month on from the end of the transitional period, so we've turned our minds to consider the possible consequences of not registering, or delaying registering, as an overseas entity in accordance with the Act, including the potential for the Proceeds of Crime Act 2002 to apply.
Requirements of the Act
The Act requires companies or other legal entities which are governed by the law of a country or territory outside the UK who own or will acquire a "qualifying estate" (being a freehold estate in land or a leasehold estate in land for a term of more than seven years), to provide details of their beneficial owners and/or managing officers.
The Act applies to an overseas entity if it owns land purchased on or after:
- 1 January 1999 in England and Wales;
- 8 December 2014 in Scotland; and
- 1 August 2022 in Northern Ireland.
In England and Wales, overseas entities who have owned a qualifying estate since 1 January 1999 had until 31 January 2023 to provide the relevant information to Companies House and register on the register of overseas entities. While that deadline has passed, any overseas entities that did not register on the register of overseas entities by 31 January 2023 will still be able to register. However, they will be in breach of the Act until they do so.
Furthermore, overseas entities are required to give details of any dispositions of land which occurred after 28 February 2022, including transfers, grants of leases for a term greater than seven years and grants of charges.
For a more detailed explanation of the requirements under the Act, please refer to our previous article on this topic here.
Consequences of Failure to Comply
Failing to comply with the requirements under the Act can result in a fine of up to £2,500 for each day of non-compliance and a prison sentence of up to five years. There are also restrictions placed on the entity's ability to buy, sell, transfer, lease and charge their land. For example, since 5 September 2022 it is not possible to register title with the Land Registry without an Overseas Entity ID.
Potential to apply the Proceeds of Crime Act 2002
Furthermore, it has been indicated by the Law Society that completion monies transferred to a non-compliant landlord may constitute proceeds of crime under the Proceeds of Crime Act 2002. This aligns with the intention behind the Act for greater transparency around land ownership in the UK and to make it harder for UK land to be used to hide the proceeds of crime. While this is yet to be tested, a further possible consequence of failure to comply with the Act to be considered is whether rent and other monies paid pursuant to a lease following the deadline for registration could be considered proceeds of crime if the landlord has failed to register on the register of overseas entities.
The position on this point is currently unclear but analogies can perhaps be drawn with criminal breaches by landlords of legislation relating to houses in multiple occupation ("HMOs"), which has an established body of case law. In the area of HMOs, it has previously been decided that the rent received by landlords where an HMO licence is not in place, is not considered to be the proceeds of crime. The failure to obtain a licence is considered a regulatory offence, rather than a criminal offence. The rent is obtained pursuant to the lease which itself remains a valid and enforceable contract, even though the licence has not been obtained. This approach was taken by the Court of Appeal in R v Sumal & Sons (Properties) Limited  EWCA Crim 1840,  1 WLR 2078.
This same approach has been subsequently followed in later cases, such as R v McDowell and Singh ( All ER (D) 257 (Feb) which also related to a failure to obtain a licence and R v Neuberg  All ER (D) 92 (Dec) which related to an offence of trading under a prohibited name. On appeal, the latter case outlined that it was necessary to conduct an analysis of the terms of the statute that created the offence and to identify the criminal conduct and whether the proceeds were obtained through that criminal conduct.
If we follow established case law applicable to HMOs and subsequent cases as guidance, it could be argued that rent and other monies received under a lease by a landlord who does not comply with its obligations under the Act should not be considered proceeds of crime because there is still a valid, enforceable contract in place (i.e. the lease) and the landlord is not unlawfully obtaining rent as a result of its failure to register on the register of overseas entities.
However, the introduction of a fine or imprisonment for failure to comply with the Act suggests that the government intends to take a tougher approach - where failure to register is to be treated as a criminal offence rather than a regulatory offence. In support of this view, the Act broadens the unexplained wealth order regime under the Proceeds of Crime Act 2002 both by extending the scope of who may be a recipient of an unexplained wealth order to include a "responsible officer" (i.e. a director, member of a body, partner, manager, secretary or similar officer of the respondent) and by adding a further ground for making an unexplained wealth order (i.e., that there are reasonable grounds for suspecting that the property has been obtained through unlawful conduct).
Given the government's purpose for the Act and the clear amendments to the Proceeds of Crime Act 2002, we don't expect the approach taken for any breaches of the Act will be light touch, particularly where there are reasonable grounds for suspecting that the property is being used to launder money. Certainly, many companies classed as overseas entities will be following these developments closely and will be eager to see the approach taken to the first offence under the Act.
Take-Aways and Future Considerations
This area of law remains undeveloped, and in the meantime, landlords should ensure that they attend to registration as soon as possible to avoid any restrictions on dealing with their land, delays on transactions completing and any possible fine or other penalty for non-compliance.
Tenants who are negotiating leases with landlords who are overseas entities should be checking if the landlord complied with these registration requirements. This can be checked by carrying out an advanced company search on Companies House and selecting "overseas entity" as the company type. If the landlord has not completed registration, we would recommend seeking advice on the best course of action.