The Economic Crime (Transparency and Enforcement) Act

Introduction

Various measures that are included in the new Economic Crime (Transparency and Enforcement) Act (the Act) have been in contemplation for a number of years, others are novel and have been inserted into the Act in such a manner that, while the Bill was passing through parliament, a former minister described it as an “economic warfare bill” because it is being positioned as part of the UK’s response to the Russian invasion of Ukraine. We have published a podcast here that covers that debate in detail.

This article summarises the key provisions in the Act, which ultimately seeks to target those seeking to hide illicitly acquired wealth in the UK, and in particular, is designed to make it easier to sanction, and to enforce against sanctioned individuals.

This article is split according to the three parts of the Act:

• Part 1 discusses the Overseas Property Register (the Register), highlighting the purpose of the Register before analysing its potential impact.
• Part 2 focuses on Unexplained Wealth Orders (UWOs), giving an overview of UWOs and explaining how they can be used to help crime prevention, as well as their potential challenges.
• Part 3 provides a summary of the sanctions reforms contained in the Act.

Overseas Property Register

The Act introduces a requirement for overseas owners of UK properties to disclose information about their beneficial owners on a Register kept by Companies House. These proposals date back to 2016, and form part of a trend in the UK requiring further transparency about beneficial ownership.

The aim of these provisions is to discourage the use of illicit finance to purchase property in the UK, and to assist with sanctions being levelled against Russian nationals and banks in response to the war in Ukraine.

The Register will contain information on beneficial owners of UK property, making it harder to hide behind shell companies to conceal ownership. This will help prevent practices that may encourage money laundering offences. As a result of amendments to the initial bill, the level of fines for contravention was increased from £500 per day (which, in the context of the super prime properties used to launder illicit money was thought to be insufficient), to up to as much as £2,500 per day. Prison sentences are also available in serious cases. A last-minute amendment also removed a proposed exemption from the disclosure requirements if it was deemed in the interests of the “economic well being of the UK”. Critics of the Bill feared such an exemption could allow oligarchs and other powerful foreign owners to lobby the Government to be kept off the register.

There has also been criticism of the lengthy transition period, which could make the Act ineffective against individuals and entities being considered in the upcoming rounds of sanctions. The transition period was reduced from 18 months in the initial bill to six months by amendment in the House of Commons, but concerns remained that this would still allow asset flight during that period as a means of circumventing the new disclosure requirements. To help resolve such concerns, the House of Lords introduced a requirement for foreign owners to disclose their beneficial ownership if they have sold a UK property any time between 28 February 2022 and the end of the transition period.

Unexplained Wealth Orders

UWOs are an investigative tool, designed to enable law enforcement to confiscate criminal assets without having to prove to a criminal standard that the property was obtained as a result of a crime being committed. The onus is put on those engaged in serious crime to justify and demonstrate the ownership of assets (to the civil standard) where it is difficult to see how they could have been legitimately acquired.

The Act makes it easier for authorities to use UWOs, by expanding the definition of a property that can be covered by UWOs to include homes held in trust or owned by shell companies. Law enforcement will have more time to make their case and will be protected against having to pay substantial costs if their attempts to secure a UWO fail. The aim appears to be to encourage enforcement authorities to use UWOs to pursue the assets of individuals and entities that have been designated as part of the Russian sanctions regime, and who have had their assets frozen. More broadly, the new rules also aim to remove some of the barriers that are perceived to have caused UWOs to be used less frequently than was originally envisaged when UWO powers were introduced with effect from 2018.

There are still challenges to overcome by law enforcement in relation to the use of UWOs. Law enforcement must have a reasonable basis to suspect that the proposed respondent does not have legitimate income to justify the acquisition of the asset. Despite the reversal of the burden of proof when pursuing a UWO, the practical reality is that, as long the target of the UWO is able to put forward any reasonable explanation for the source of the asset – for instance where persons might have mixed legitimate and illegitimate income – pursuing illegitimate assets will require a detailed investigation into the proposed respondent’s explanation. This is necessarily complex and requires significant resource and time. It is unclear whether, particularly where law enforcement already faces budgetary challenges, the changes under the Act will lead to a marked uptick in UWOs.

Sanctions reform

The Act sets out reforms that are designed to, and appear likely to, intensify both the UK Government’s imposition of sanctions on Russian persons but also, in due course, sanctions enforcement which has historically been limited.

Currently, OSFI, the UK's sanctions enforcer, can only impose civil 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. OFSI will be able to impose civil monetary penalties on a ‘strict liability’ basis, meaning that a sanctions breach can be committed regardless of intent or knowledge of the breach. This aligns the position in the UK with the approach in the US to civil sanctions enforcement.

OFSI will also be able to publicly name companies that have breached sanctions, but have not been fined, which is clearly designed to increase the deterrence effect for minor, inadvertent lapses where OFSI may not feel it is appropriate to impose a financial penalty.

The Act also makes it much easier for the Government to designate persons, in particular by allowing for an emergency procedure to designate persons sanctioned by the EU and US – but not yet the UK, and seek to address the perceived failure to impose sanctions on individual oligarchs at sufficient pace.

These measures are all likely to result in more fines for sanctions breaches, and are intended to support the recent wave of sanctions against Russian nationals and banks arising out of the ongoing war in Ukraine. We anticipate that the aftermath of the current wave of sanctions on Russia will reveal considerable evidence of breaches, whether minor or significant, and that – in part due to the lower resource burden on enforcement – many of these will be dealt with by way of OFSI’s civil process.

A significant challenge to the Act, and what will ultimately determine its efficacy, is the financial backing that Government is willing to give to support it. It remains to be seen whether the various enforcement agencies and regulators required to use the powers included in this Act will receive an increase in resourcing to match that burden.

What’s next?

The Act was fast-tracked through parliament, and passed into law on 15 March. These reforms are likely to have a significant impact both in the near term and going forward, primarily because we are likely to see an increased impetus for enforcement. For our clients, the Register has the most immediate practical impact – as you must act quickly to register captured property in order to avoid the penalties, but the imposition of strict liability for civil monetary penalties for sanctions reforms is likely to have most significant impact in the longer term.

The Act does not contain all of the measures that were to be part of the long gestating economic crime bill that had been expected to be go before Parliament later this year, most particularly in relation to major reforms to the role and powers of Companies House. However, the UK Government has indicated that there will be a second economic crime bill, which could be introduced in Parliament as early as May 2022. We expect that further bill to complete proposed reforms to Companies House, pick up a range of additional measures that have been proposed previously (e.g. new powers to make it easier for law enforcement to seize crypto assets), and probably add further enhancements to the Government’s sanctioning powers. There remains the prospect that, given the increased weight the Government is now giving to economic crime matters, the next bill could include the Government’s response to the Law Commission’s report on reforms to corporate criminal liability which is also expected in or around Spring this year. It is far from a foregone conclusion that this will resolve the debate of whether or not some form of “failure to prevent economic crime” offence will be introduced, but in the current political environment it may well be difficult for the Government to reject any Law Commission conclusion to the effect that reform is necessary.