In August 2018 we produced a short guide on the draft legislation relating to the introduction of a public register of beneficial ownership of overseas entities owning property/land in the UK (the Bill) and how this might affect UK real estate finance transactions – please click here to see the guide.
As noted in the guide, the main aim of the Bill is to identify and record in a public register (the Register) “overseas entities” who transact in UK real estate with a view to preventing and combating those entities from investing illicit funds into, or laundering money via, the UK property market. The Register would be held at Companies House and each overseas entity on it would be required to:
- identify and disclose its beneficial owners (including its ultimate beneficial owner); and
- update the Register annually.
Failure to meet these requirements would prevent the relevant overseas entity from selling, leasing or creating a legal charge over the land. This could affect lenders and borrowers in real estate finance transactions in a number of ways as noted in our August 2018 guide.
The pre-legislative scrutiny report (the Report) in relation to the Bill has recently been published, so we thought this would be an apposite moment for a quick refresher on the draft Bill (see above) and to examine the Report and its recommendations.
In a nutshell, the Report praises the purpose of the draft legislation but warns that more detail is needed in certain areas and there are some loopholes which, if left open, could undermine the key tenets of the legislation. The most notable points are as follows:
- Beneficial ownership: the percentage thresholds that the Bill uses to define beneficial ownership, as well as the definition of what it means to have significant influence or control over an entity, should reflect those used in the existing persons with significant control framework in order to prevent the imposition of an additional burden on users. In addition, the authors of the Report consider that setting the shareholding/voting rights disclosure threshold in relation to overseas entities at 25% is too high as it could encourage persons to use one or more corporate vehicles each owning just under 25% to avoid disclosure.
- Trusts: trusts are not classified as “entities” in the Bill so they are not covered. Accordingly, there is a concern that, once the draft legislation is put in place, trusts may be used to avoid compliance with it. To address this, the Report recommends that the upcoming Fifth EU Anti-Money Laundering Directive, which is set to widen access to beneficial ownership registers and amend the type of trusts which must register information, is implemented into UK legislation at the same time as the Bill.
- Exempt entities: the government has the power to make certain entities exempt from publishing all or some of their information on the Register. The authors of the Report argue that the need to have exempt entities at all should be clearly articulated and, if retained, the government should publish annual statements to Parliament stating the number of times this exemption has been used.
- Up-to-date Register: the Register must be kept up to date otherwise it may serve little purpose. The Report suggests that annual updates may be insufficient and also that information should be provided about proposed transactions before they take place, thereby capturing updated information at or before the point where most money laundering activity is expected to occur.
- Accuracy of information: the current proposals should include a robust verification mechanism to ensure that false information is not submitted.
- Civil penalties: the Report states that enforcing this legislation may be difficult and that civil penalties, rather than criminal sanctions, are likely to be easier to enforce.
We will seek to keep you up-to-date with the anticipated entry of the Bill into the statute book as it makes its way through the legislative process.
Andrew Dodds, Partner at Stevens & Bolton, comments:
“The Bill is a piece of legislation that should improve transparency of ownership of UK property although the recent pre-legislative scrutiny report suggests that there is further thinking to be done on some issues before the Bill passes into law. From a practical perspective, the proposed registration regime is likely to create an additional burden for real estate finance borrowers and lenders alike, and they should expect to incur extra cost and administration time when applying the requirements of this legislation in their day to day working practices.”