Following the introduction of the Register of Overseas Entities, firms advising overseas entities who wish to buy, sell, or transfer property or land in the UK face a new set of risks. These include the need to undertake verification checks, and the requirement to update the register annually. Where firms fail in their responsibilities, they may be liable for any losses sustained by their clients. As a result, great care must be taken to ensure compliance.
In search of transparency
The Economic Crime (Transparency and Enforcement) Act 2022 came into force on 1 August 2022. It introduced a requirement for all overseas entities who wish to buy, sell, or transfer property in the UK to record information about themselves on a new Register of Overseas Entities (ROE) (opens a new window) at Companies House, and to provide information about their registrable beneficial owners or managing officers.
Broadly speaking, this includes submitting information about anyone with more than a 25% share or voting right in the entity, or who is otherwise in a position of significant influence or control. An overseas entity includes any legal entity, such as a company or other organisation, that has legal personality and is governed by the law of a country or territory outside the UK.
Entities must also provide evidence of verification of identity. Those permitted to undertake such verification are UK-based agents supervised under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and includes accountants and solicitors.
Entities that fail to register will find themselves unable to buy, sell, transfer, lease or charge property or land in the UK. Failure to comply with the rules may also be punishable by fines, or imprisonment of an entity’s directors.
Verification presents a challenge
In particular, the introduction of the verification process presents significant risk for accountants and solicitors who fail to get up to speed with the new rules. These rules go beyond what firms may be used to in relation to anti-money laundering (AML) requirements, so it is not simply a case of replicating the checks already carried out.
As above, failure by a client to register in the ROE could mean that the client is unable to dispose of (or deal effectively with) property. Where such failure was caused by a firm’s advice (or lack thereof) the client could make a claim against that firm for the financial loss suffered as a result. There may also be a risk of claims for loss of a chance, or the loss of a potential profit, on a property transaction where a firm fails to verify beneficial owners.
Firms may also be at risk of claims from lenders. The impact of the new rules on securities over property held by overseas entities may see lenders review their existing portfolios (as well as their back book, given that the Act has retrospective effect), and take steps to ensure borrowers are properly registered. This could potentially result in claims against firms if they have failed to ensure compliance.
In addition, firms may be exposed to criminal and regulatory proceedings where they fail to comply with the strict requirements of the verification process.
Annual updates bring ongoing risk
Under the conditions of the ROE, overseas entities must file an annual update one year after it was registered, and every year after that. This will be used to inform Companies House of any changes, or to confirm that information held is still correct. Updates must be filed no later than 14 days after the due date.
For accountants and solicitors, this requirement could result in claims where firms fail to advise clients of the need for updates. Claims could also result where it is not made clear in the scope of work in the letter of engagement whether such updates will be dealt with by the firm.
Filing of annual updates is also likely to demand significant resources. Firms should consider the requirement for annual updates to the ROE, and whether they are prepared to take on the responsibility of diarising and complying with that requirement.
Where firms are not prepared to take on these responsibilities, they should consider explaining that position clearly to the client, and explicitly exclude such updates from the scope of work in the letter of engagement.
Insurance considerations for firms
Firms seeking to offer ROE verification services would also be wise to check this with their professional indemnity insurance (PII) providers. Insurers may consider the risk is too onerous and will want to be satisfied that a firm has adequate systems and processes to undertake this work.
Similarly, Lockton has observed numerous cases in which an overseas entity has directors or shareholders who are politically exposed persons (PEPs), or who are domiciled in Russia or other sanctioned countries. This is of particular concern to insurers, who will undertake their own compliance and sanctions checks.
While PII policies will almost certainly have a ’sanctions exclusion’ in the policy wording, insurers will often go further and apply a specific exclusion for an individual or entity. Where a specific exclusion is applied, firms may need to refer to their regulatory body to ensure the PII requirements are satisfied.
The non-payment of tax, penalties and interest by an overseas entity is also presenting concern to insurers, particularly if the appropriate checks have not been carried out.
Regardless of the area of practice, firms will need to keep up to date with how the changes might affect their clients. In all cases, firms should be clear with their clients about the scope of a piece of work and whether that includes ROE verification. Above all, caution should be exercised before a firm chooses to carry out verification, and the circumstances of each request should be considered individually.
If your client is an overseas entity, check whether they are registered by visiting the ROE (opens a new window) on the Companies House website
Look out for failures to register – do not assume clients are registered simply because the deadline has passed; failure to do so could risk the transaction being lost
For firms registered as verification agents, ensure letters of engagement/terms and conditions set out in detail the services you will and will not provide
If firms are not registered agents, check whether letters of engagement/terms and conditions refer specifically to the ROE; if not explicitly excluded, clients may assume that firms deal with registration as part of a conveyancing transaction
Set up automated reminders to check for annual registration updates for existing clients
Ensure familiarity with the government guidance (opens a new window) on the ROE, and train staff to look out for involvement of overseas entities in a transaction and to check the register
For solicitors queries:
Matthew Thomson, Client Executive
T: +44 (0)770 918 9572
For accounting queries:
Catherine Davis, Vice President
T: +44 (0)117 906 5069