Quick reference guide: Economic Crime (Transparency & Enforcement) Act 2022 (the 'ECTEA')

Overview

The registration provisions of the ECTEA are now in force. The aim of the ECTEA is to make ownership of property in the United Kingdom by overseas entities more transparent, by identifying the beneficial owners/people with control.

• 'Overseas entities' owning 'qualifying estates in land' must register with Companies House on or before 31 January 2023.

• 'Overseas entities' are legal entities governed by laws outside of the United Kingdom (meaning the self-governing Crown Dependencies of the Isle of Man, Guernsey, Jersey and the Republic of Ireland are caught by the ECTEA).

• A 'legal entity' is a body corporate, partnership or any other entity that has separate legal personality under its governing laws.

• 'Qualifying estates in land' means freehold estates (of both residential and commercial land and/or property), and leases granted for a term of more than seven years from the date of grant.

• An overseas entity must submit information to Companies House about itself, its beneficial owners and its officers, or risk significant criminal penalties.

• A 'beneficial owner' can be an individual, legal entity, a government body, or public authority that directly or indirectly:

  • holds more than 25% of either the shares or the voting rights in the overseas entity;

  • has the right to appoint/remove a majority of its board of directors;

  • exercises/has a right to exercise significant influence or control over the overseas entity;

  • are trustees of a trust, members of a partnership, unincorporated association or other entity that fulfil one or more of the conditions above; or

  • someone who exercises/has the right to exercise, significant influence or control over the activities of that trust or entity.

Although the measures introduced by the ECTEA are designed to help combat money laundering, the ECTEA applies equally to all overseas entities. This means, for example, that overseas entities incorporated in Guernsey for tax purposes, such as some pension schemes, will be just as affected as overseas entities registered in Russia.

Companies House registration

Companies House has created a register (searchable through the Companies House website) which lists registered overseas entities, contains details of pending applications for registration and includes copies of documents provided.

• The obligations under the ECTEA for England and Wales (there are some variations for Scotland and Northern Ireland) will apply retrospectively to all overseas entities that applied to become registered as proprietors of qualifying estates on or after 1 January 1999. Such overseas entities must apply for registration at Companies House within the six month 'transitional period', starting on 1 August 2022 and ending on 31 January 2023.

• Companies House are writing to overseas entities who own qualifying estates inviting those entities to register, but overseas entities with qualifying estates should apply to register as soon as possible and not wait to receive the letter.

• If an overseas entity has made/intends to make any relevant dispositions of qualifying estates (which includes freehold sales, grants of leases for terms of over seven years and grants of legal charges) on or after 28 February 2022, but before making the application for registration at Companies House, the application must include details of those dispositions, including the date and the relevant title number(s).

• Overseas entities will need to provide information even if they have disposed of all qualifying estates between 28 February 2022 and 31 January 2023.

• Overseas entities will also need to register if they propose to acquire a qualifying estate.

• Once an overseas entity has the required information, they must have it verified by a 'relevant person' as defined under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. A relevant person includes credit/financial institutions, auditors, insolvency practitioners, accountantsax advisers, independent lawyers, trust or company service providers, estate agents and letting agents.

• The overseas entity can then complete an online form to submit the information to Companies House and pay a registration fee of £100 (or ask the relevant person to complete and submit the application on its behalf).

• For guidance and a link to the online registration form, click here.

• Once registration is completed, Companies House will record the date of registration and the overseas entity ID in the register and issue an 'overseas entity ID' to the applicant.

• The register will be available for public inspection but certain personal information can be withheld.

• There will be an ongoing annual duty to update the register (within a 14-day period of each anniversary of registration or of the last update). Failure to comply with this duty will constitute a criminal offence by the entity itself, and every officer of the entity in default, punishable by daily fines and in serious cases, imprisonment. Updating deadlines will need to be diarized carefully as there may be further delays with applications to update information

• An overseas entity will have the right to apply for removal from the register, when it can establish it is no longer registered as the proprietor of a qualifying estate.

Implications for land registration

HM Land Registry is entering restrictions in the registers of title of qualifying estates when it is satisfied that:

• an overseas entity is registered as the proprietor of the property; and

• the entity became registered as the proprietor pursuant to an application made on, or after 1 January 1999.

The restrictions will take effect from 31 January 2023 and will prohibit the registration of any dispositions (meaning sales, leases of more than seven years or legal charges) unless, at the time of application:

• the entity is either a registered overseas entity (and up-to-date with its filing requirements) or exempt, or

• the disposition is exempt from compliance with the restriction (for example, the disposition is due to an earlier exchanged contract, or a court order or is made with consent of the Secretary of State. However, consent of the Secretary of State is only likely to be given in limited circumstances in the interests of national security, or to prevent or detect serious crime).

This means that:

• Buyersenants will not be able to acquire legal title to qualifying estates from overseas entities unless the provisions of the ECTEA are complied with.

• Lenders will not be able to acquire a legal charge when refinancing existing property owned by an overseas entity unless the overseas entity is a registered overseas entity.

• Lenders will also be unable to acquire legal charges over property purchased by an overseas entity, as the transfer of that property will not be capable of registration at HM Land Registry until the overseas entity is registered.

• Sellers transferring property to overseas entity buyers will be left holding the legal title on trust for the buyer until the buyer is a registered overseas entity (only the beneficial interest will transfer).

• Landlords leasing property to overseas entity tenants (for a term of more than seven years) will not be able to grant a legal lease until the tenant is a registered overseas entity (the lease will only exist in equity).

• An overseas entity will not be able to be registered as proprietor proprietor of a freehold estate or register a new lease unless it is registered at Companies House.

Impact on Real Estate transactions

• Transactions involving overseas entities will take longer if dependent on Companies House registration.

• There will be a rush to get contracts exchanged, or transactions completed, during the transitional period.

• For all transactions involving overseas entities, contractual provisions will need to be added to ensure compliance with the ECTEA. For example:

  • When buying or taking a lease of property owned by an overseas entity, the sale should be made conditional on the seller/landlord being registered and providing details of its overseas entity ID.

  • Contracts for sale to overseas entity buyers will need to be conditional on the buyer's registration, to ensure the seller isn't left holding the legal title on trust for the buyer.

  • Landlords granting leases to overseas entity tenants will want conditions

  • to ensure the tenant is a registered overseas entity, so that the lease can be registered at HM Land Registry and takes effect in law.

Hints and tips:

• Overseas entities that already own or intend to purchase a qualifying estate, should obtain the following information and apply to register as soon as possible:

  • Official name, country of incorporation or formation, registered or principal office, address for service, an email address, details of the legal form of the entity (for example company or legal partnership) and the law by which the entity is governed. Registration numbers for any official registers the overseas entity is registered under will also be required.

  • Information on the officers, beneficial owners, persons with significant control and details of any recent transactions disposing of qualifying estates.

  • Identifying all land it holds in the UK.

  • Collating information on all 'relevant dispositions' that have taken place on/after 28 February 2022 and the date of the application.

• The procedure for beneficial owners is complex and time consuming. To comply with the identification requirements, the entity must give an information notice to any person that it knows, or has reasonable cause to believe, is a registrable beneficial owner beneficial owner of the entity. This information notice requires the recipient to:

  • State whether or not they are a registrable beneficial owner in relation to the overseas entity and if so, confirm the information in the notice about them is correct, provide any missing information, and provide further information in the event they are holding the interest as a trustee.

• Overseas entities will need to undertake a detailed and careful administrative exercise to obtain all required information, as failure to register will amount to a criminal offence committed by the entity and any officers in default, punishable by fines, or up to five years imprisonment, or both.

• Overseas entities must apply to register as soon as possible, and promptly appoint someone to deal with the application/verification, as there are likely to be backlogs/delays. Freeths can help by referring overseas entities to someone who can deal with the application, and or verification.