Corruption Crackdown: Amending the Economic Crime Bill

According to Transparency International’s 2016 Report ‘Corruption on your Doorstep’, London acts as a “safe haven” for corrupt capital stolen from around the world because anti-money laundering checks can be bypassed, making London the preferred option “not only for legitimate business but also for embezzled, stolen, or illegally gained wealth”. This means that the UK law inadvertently facilitates money laundering by allowing UK property to be owned by secret offshore companies with the identity of beneficial owners concealed. This year, they found that £1.5 billion worth of UK property (more than any other country) has been bought by Russians accused of corruption and links to the Kremlin.

Spurred on in part by these illicit activities, the Foreign Commonwealth & Development Office announced on 4th March 2022 that a series of amendments to the Economic Crime (Transparency and Enforcement) Bill (‘the Bill’) were being presented to parliament.  The Bill proposes:

  • increasing corporate transparency of ownership of property in the UK, thus reducing the risk of property being used to launder money
  • using amendments to strengthen the UK’s sanctions regime so that the government can “move faster and harder when sanctioning oligarchs and businesses associated with the Russian Government”
  • reforming the use of Unexplained Wealth Orders

The Bill was expected to be expedited through the stages of the House of Commons and through to the House of Lords by Monday 7th March, and coincides with the Financial Action Taskforce (FATF)’s recently announced intention to issue guidance for the real estate sector, having identified it as a popular choice of investment for criminals.

A draft Economic Crime Bill has been discussed for several years, with the then-Prime Minister David Cameron proposing establishing a register of overseas entities owning UK property in 2016. However, the Bill has seen renewed enthusiasm following Russia’s invasion of Ukraine.

“We will ramp up the pressure on those criminal elites trying to launder money on UK soil and close the net on corruption. They will have nowhere to hide.” – Prime Minister Boris Johnson

Below we cover each of these areas in a little more detail.

Register of Overseas Entities

Under the current rules, anyone can set up a company in the UK for just £12 without proof of identity or address. However, the Bill would create a new Companies House public register of foreign owners of UK property. This will require any overseas entity wishing to purchase UK property to identify and register their beneficial owners (in line with the threshold for becoming a registerable beneficial owner under the existing people with significant control (PSC) regime).  This brings the requirements in line with the register for UK companies, which have been required to provide such information since 2016.

The register will need to be updated annually. Failure to register or submission of false information will lead to penalties, including preventing the entity from being able to buy and sell UK property in the future, daily fines, and prison sentences of up to five years. Fines were originally levied at £500 per day, but Steve Goodrich from Transparency International UK told the Guardian that this was “small change for those with deep pockets”. Subsequently, the government has increased criminal penalties to £2,500 per day.

The new register will apply retrospectively to property bought on or after 1 January 1999 in England and Wales and 8 December 2014 in Scotland. In the first draft of the Bill, overseas entities would have had an 18-month transactional period from the Act coming into force to dispose of their property or register. The government has since shortened this deadline to 6 months to help crack down on money laundering through UK property whilst giving those with legitimate reasons for holding property in overseas entities appropriate time to comply with the new requirements.

“The new register will shine a light on who owns what in the UK so we can flush out the oligarchs, criminals and kleptocrats who think they can use UK property to hide their illicitly obtained wealth.” Busines Secretary Kwasi Kwarteng

Unexplained Wealth Orders

Unexplained Wealth Orders (UWO) are a court order that requires the respondent to provide details of their interest in the specified asset and how they obtained it. They were introduced in 2018 to help law enforcement authorities tackle money laundering by giving them the authority to seize and dispose of unlawfully obtained property in certain circumstances. Failure to comply with a UWO could suggest the asset was obtained through unlawful conduct, thus making it easier for authorities to seize. However, UWOs have been criticised because they can be costly for authorities to implement, as in a recently defeated UWO case which cost the National Crime Agency £1.5 million. Moreover, a report by the Organised Crime and Corruption Reporting Project stated that UWOs have a “limited purpose”, illustrating a lack of confidence in them.

The Bill aims to revitalise UWOs by making three main changes:

  • Creating a new category of people who can be served a UWO and expanding its definition. ‘Responsible officers’ such as directors, officers and trustees will be brought within scope to ensure they cannot hide their shell companies. This makes it easier for authorities to investigate assets held via complex ownership structures.
  • Giving authorities an additional 126 days (making a total of 186 days) to review the material provided in response to a UWO before the interim freezing order expires.
  • Minimising the risk of substantial legal costs to law enforcement agencies in the event of an unsuccessful application for a UWO. Under the Bill, law enforcement agencies would not be required to meet respondents’ costs as long as the law enforcement agencies can demonstrate that they behaved reasonably and honestly.

Sanctions

The UK has been leading the way with its tough package of sanctions against Putin’s regime, and the new reforms will intensify sanctions enforcement. The Office for Financial Sanctions Implementation (OFSI) is the UK’s sanctions enforcer and can only impose monetary penalties on firms that it knew or had ‘reasonable cause to suspect’ had breached sanctions.

The Bill removes the current “appropriateness” test within the Sanctions and Money Laundering Act 2018 which dictates that ministers cannot designate an individual or entity as sanctioned unless they consider that the designation is appropriate in relation to the relevant sanction regime.  Removal of this test would mean that individuals or entities may become designated as sanctioned based on a minister having reasonable grounds to suspect that they are or have been involved in a particular activity specified in the relevant sanction regime (or are owned, controlled, or associated with such a person). Moreover, under the new reform, OFSI will be able to publicly name companies that have breached sanctions, even if they have not received a fine.

These measures are intended to support the recent wave of sanctions against Russian nationals and banks as a result of the ongoing conflict in Ukraine.

Conclusion

The introduction of the Bill will undoubtedly improve corporate transparency and strengthen money laundering law enforcement powers by developing a register of overseas entities and reforming the UWO and Sanctions regime.  Whilst the Bill has been fast-tracked due to Russia’s invasion of Ukraine, it is important to remember that it is not only specific to Russia, and these measures will reform the UK’s entire economic crime landscape.

Anti-Financial Crime Support – How can Complyport Help?

Our experienced Financial Crime and Forensics team led by Martin Schofield—one of the world’s leading specialists in the field—brings a wealth of experience to every project we are engaged in. Our highly experienced financial crime professionals and forensic experts, in subjects such as anti-money laundering, counter terrorist financing, anti-bribery and corruption and fraud and regularly help our clients navigate the complexities of the financial crime and money laundering environment. Services offered by Complyport include:

  • Financial crime health checks and audits,
  • Implementation of financial crime, AML, CTF, ABC, Fraud and market abuse controls and frameworks,
  • Ongoing advice on financial crime, AML, CTF, market abuse and fraud prevention,
  • Authoring/reviewing financial crime policies,
  • Outsourced MLRO support
  • Outsourced KYC and CDD support,
  • Assistance in identifying Politically Exposed Persons (PEPs),
  • Assistance in navigating international sanctions,
  • Support with preventing market abuse and insider dealing,
  • Expert Witness in Financial Crime cases
  • Forensics and Investigations
  • Design and/or delivery of online or face to face financial crime training

If this article has raised any questions, or you think your firm may require assistance, please contact either Martin Schofield via martin.schofield@complyport.co.uk or Jan Hagen via jan.hagen@complyport.co.uk to book in a free consultation.

About Complyport

Complyport is the City’s market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.

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Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.

Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.

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