UK to boost sanctions enforcement and corporate transparency

Details of the planned stiffening of sanctions enforcement in the UK were set out by the government as it announced the imminent publication of a new Economic Crime (Transparency and Enforcement) Bill following Russia’s invasion of Ukraine. The UK government has announced a significant package of sanctions in the wake of the invasion.

The proposed reforms include the introduction of a ‘strict civil liability test’ for monetary penalties, meaning the Office for Financial Sanctions Implementation (OFSI) would no longer be required to show that firms had knowledge or a ‘reasonable cause to suspect’ sanctions are being breached to be liable for fines, the Treasury said.

OFSI is also set to get new powers to name and shame organisations that breach financial sanctions even if they have not been hit with a fine, it said.

A criminal investigations unit has also been set up within the UK’s National Crime Agency (NCA) separately targeting “those seeking to bypass the severe economic sanctions announced against Russia”, it said.

As well as addressing sanctions enforcement, the new Bill is aimed at enhancing existing powers the NCA has in relation to unexplained wealth orders (UWOs).

UWOs were first introduced in the UK in January 2018, under the 2017 Criminal Finances Act. Once granted by a court, an UWO compels a person to explain the nature and extent of their interest in particular assets worth £50,000 or more; explain how they obtained the assets, especially how they were funded; and to disclose any other information specified in the order. Failure to comply with a UWO creates a presumption that the assets have been obtained through unlawful conduct, and they are therefore vulnerable to civil recovery proceedings.

The Treasury said: “Under the reforms being brought in on UWOs, those who hold property in the UK in a trust will be brought within scope and the definition of an asset’s ‘holder’ will also be expanded to ensure individuals can’t hide behind opaque shell companies and foundations. The reforms will also remove key barriers to the use of UWOs by increasing time available to law enforcement to review material provided in response to a UWO and reforming cost rules to protect law enforcement agencies from incurring substantial legal costs if they bring a reasonable case that is ultimately unsuccessful.”

Wide-ranging plans to boost transparency over who owns companies registered in the UK were also set out by the Treasury.

The new Bill will make provision for a Register of Overseas Entities to be established within Companies House to force overseas entities to declare their ‘beneficial owner’. The Treasury said this will prevent foreign criminals from hiding behind “secretive chains of shell companies”. Non-compliance with the new rules could result in imprisonment for up to five years, according to what is proposed.

“The requirement will apply retrospectively to property bought up to 20 years ago in England and Wales and since December 2014 in Scotland, creating a potentially significant compliance burden for relevant entities and individuals,” regulatory and white collar crime investigations expert David Hamilton of Pinsent Masons said. “With breaches carrying criminal liability, it will be interesting to see how aggressively registration requirements are prosecuted in practice.”

The legislative proposals have been accompanied by a new white paper on corporate transparency and register reform which provide further details of changes in the law that the government will pursue in a further Economic Crime Bill, which the Treasury said is expected to be published in the coming months.

Companies House reform has been anticipated for some time. The government consulted on a range of measures to enhance its role and increase corporate transparency more generally in 2019, and subsequently set out its response in September 2020, where it outlined a series of measures designed to achieve those aims.

The future plans include the introduction of mandatory identity verification for the vast majority of individuals incorporating or filing with Companies House. If an individual fails to verify, this will be “annotated” on the public register. Companies House is also to get new querying powers to challenge suspicious filings and to share data with other UK authorities where it identifies potential criminality or national security risks.

A maximum of one “layer” of corporate directors, who must be based in the UK, is also to be imposed, along with a crackdown on the use of overseas agents for forming UK companies.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said: “Generally, the final package of reforms follow those trailed in the government’s consultation. There will be no change to the point at which, legally, a person becomes a director and, as now, directors have to be registered at Companies House within a set period after appointment. Going forward, a director will not be able to be registered without a verified account with Companies House and verifying their identity. It is proposed that Companies House will carry out this verification by cross checking against a database of verified accounts. This will require up-to-date documentation, contributing to transparency, and an extra step in the current process.”

The government said in its white paper: “Intelligence from law enforcement suggests that those using UK corporate structures for criminal or corrupt activity often use formation agents. If based in the UK, such agents are required to be supervised by HMRC or a professional body under existing money laundering legislation. But there is currently nothing to stop agents based overseas, who may not be subject to equivalent supervision, from making filings with Companies House.”

“In future, agents will be required to evidence that they are adequately supervised before they can register with Companies House and file on behalf of their clients. This evidence will be cross-checked against information from HMRC and the Financial Conduct Authority to ensure its validity. In effect, overseas agents will no longer be able to access Companies House unless at some future date the government determines that any other jurisdiction should be deemed to have an equivalent supervisory regime,” it said.

Hamilton said: “While certain reforms have been introduced as part of the UK’s implementation of the Fifth Money Laundering Directive, a significant proportion of the proposals have yet to see the light of day, with the Economic Crime Bill controversially shelved earlier this year. The current crisis in Ukraine, which has shone the spotlight on the vast corporate empires of Russia’s oligarchy, has spurred the government into action.”

Also included within the future Economic Crime Bill will be “new powers to seize cryptoassets and bring them within scope of civil forfeiture powers”, the Treasury said. This, it added, would help “tackle the growing threat from ransomware and the use of cryptoassets for money laundering”.

Hamilton said: “The clear immediate focus is to pursue individuals and companies who have turned to crypto as an alternative means of hiding wealth as sanctions block access to traditional financial services. How these powers will be used in practice remains to be seen, however the move to strengthen civil forfeiture is the latest in a string of legislative changes designed to mitigate the risk of cryptoassets being used to further crime.”

“Crypto exchanges and digital wallet custodians have since January 2020 been subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and must be registered with the Financial Conduct Authority to continue doing business in the UK. In addition, the EU has recently announced plans to increase transparency of parties to crypto transactions, bringing them more in line with traditional bank wire transfers,” he said.