Economic Crime Act – the UK passes new legislation to tackle economic crime and sanctions evasion

Alert
|
7 min read

On 15 March 2022, the UK passed the Economic Crime (Transparency and Enforcement) Act (the "Act"), which is designed to tackle economic crime and sanctions evasion.

The enactment of the legislation follows several years of discussions on economic crime reform in the UK and is the result of the Government fast tracking its Economic Crime (Transparency and Enforcement) Bill through Parliament in response to the events in Ukraine.  The Act contains measures designed to increase transparency and give law enforcement enhanced powers to combat money laundering and sanctions breaches.

 

Brief History of the Act

Elements of the Act have been a topic of discussion for several years.  The register of overseas entities owning UK property was first announced by then-Prime Minister David Cameron in March 2016, and a draft Economic Crime Bill had been prepared in 2018. The Economic Crime Bill’s progression into law had slowed as the Government prioritised other areas of reform, resulting in uncertainty as to what the Bill would include and criticism that the Government was not doing enough to combat financial crime. 

However, as a result of the events in Ukraine, the Government fast-tracked its Economic Crime (Transparency and Enforcement) Bill, introducing it into Parliament on 1 March 2022.  The Act received royal assent in the early hours of Tuesday 15 March.

 

The Act

The Act covers the following key areas:

Register of Overseas Entities

The Act will introduces a new register of overseas entities, which will include information about overseas entities that own UK property and their beneficial owners. The Government intends the register to "level the playing field" with UK incorporated companies, which have been required to provide such information for inclusion in a register of Persons with Significant Control ("PSCs") since 2016.

The new register applies retrospectively to property bought since January 1999 in England and Wales and since December 2014 in Scotland. An overseas entity that owns such property will be required to register with Companies House (the UK registrar for companies), take reasonable steps to identify its beneficial owners and provide verified information about them to Companies House. Some information on the register – including the identities of overseas entities and beneficial owners – will be open for public inspection. 

Entities that do not register will face sanctions, including restrictions on registering or disposing title that would prevent the property being sold, and criminal sanctions for the entity and its officers, with daily fines of up to £500 and prison sentences of up to five years.

Unexplained Wealth Order Reforms

The Act also contains a number of provisions that are intended to strengthen unexplained wealth orders ("UWOs"). UWOs were introduced in 2018 as a tool for law enforcement authorities to tackle money laundering. 

A UWO is a court order that requires the respondent to provide details of their interest in the specified property and explain how they obtained it (including, in particular, how it was paid for). If the respondent fails to comply, there is a presumption that the property was obtained through unlawful conduct, making it easier for authorities to seize. 

UWOs are targeted at people who hold public office (outside Europe) or who are suspected to be linked with serious crime, and were intended to form part of a crackdown on high-end economic crime. However, to date there have been only four cases involving UWOs, with mixed results. The most recent case (Baker) ended in June 2020 with a defeat for the National Crime Agency ("NCA") and a costs bill in the region of £1.5 million. No UWOs have since been issued.

The Act aims to revitalise UWOs by making them easier to use and less financially risky for law enforcement authorities, which should encourage increased future use:

  • Costs rules are reformed to limit the costs to authorities that unsuccessfully seek to obtain a UWO, with the authority only being required to pay a respondent's costs where the authority has acted unreasonably, dishonestly or improperly. 
  • UWOs are issuable to a respondent's directors, officers or trustees, making it easier for authorities to investigate property held via trusts or offshore structures. 
  • Authorities are given more time to review material provided in a response to an UWO.

Sanctions Reforms

The reforms under the Act are also likely to intensify sanctions enforcement. Currently, the Office for Financial Sanctions Implementation ("OFSI"), the UK's sanctions enforcer, can only impose monetary penalties on a person who breaches financial sanctions if it is satisfied that they knew or had 'reasonable cause to suspect' that they were in breach. The Act removes this requirement, enabling OFSI to impose monetary penalties on a 'strict liability' basis.

Under the Act, OFSI can also publicly name companies that have breached sanctions, but have not been fined.

These measures are likely to result in more and larger fines for sanctions breaches, and are intended to support the recent wave of sanctions against Russian nationals and banks arising out of the ongoing situation in Ukraine. For further information, see our recent client alerts.

The Government has also announced that it intends to set up a dedicated NCA 'Kleptocracy' team to investigate evasion of the recent Russian sanctions, likely in response to the dramatic increase in OFSI's workload and criticism of the limited amount of sanctions enforcement to date.

 

Further Economic Crime Reforms to Come

The Government has also recently published a White Paper setting out its plans for further Companies House reforms. As with the Act, these have been under discussion for some time – with a Government consultation and response in 2019-20 – but have now been fast-tracked as part of the Government’s response to events in Ukraine.

The White Paper's proposals include requiring directors and PSCs to verify their identity with Companies House, and allowing companies to have only one 'layer' of corporate directors, which must be UK-based. Overseas agents will be prevented from forming UK companies, unless they are subject to a UK-equivalent supervisory regime. Companies House will also be given powers to reject filings, query information that may be false or inaccurate, and share information with law enforcement authorities. 

These reforms will form part of a second Economic Crime Bill that is expected in the coming months, in an effort to further address illicit finance and improve corporate transparency. Other measures to be included in the second Bill include new powers to seize crypto assets, enhanced anti-money laundering powers to encourage businesses to share information on suspected economic crime, and measures to restrict the misuse of limited partnerships. 

This flurry of economic crime measures will allow for more aggressive enforcement, and the Government's announcements indicate that, in the short term, they are likely to see heavy use in support of the UK's response to the situation in Ukraine. However, while their introduction has been triggered by the events, they are not Russia-specific (in contrast to the UK's recent financial sanctions), but are intended to form part of a broader reshaping of the UK's economic crime landscape. It remains to be seen how successful that will be, how far the current levels of political will and enforcement appetite are sustained, and what impact these measures will have outside the current context.

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

 

Top