Evaluating the UK’s Economic Crime Act

July 2022  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

July 2022 Issue

In March, the UK’s Economic Crime Transparency and Enforcement Act 2022 came into effect following urgent calls for the UK’s laws in this area to be tightened. The new legislation introduces further sanctions powers and aims to tackle financial crime by revealing the identities of overseas beneficial owners of UK property.

The Act introduced measures that had been contemplated for several years. “These measures became a reality in the wake of the Russian invasion of Ukraine,” says Niall Hearty, a partner at Rahman Ravelli. “The key provisions of the new Act seek to target those who attempt to hide their illicitly-acquired wealth in the UK and to bring about sanctions reform. The key driver behind the Act was the UK government’s urgent response to the Russian invasion of Ukraine.

“As a consequence, the Act was fast-tracked through parliament,” he continues. “A former minister went as far as to describe it as an ‘economic warfare bill’ due to the severity of the response deemed necessary following the developments in Ukraine and the need for a unified voice in tackling Russia’s unsolicited aggression against a neighbouring country.”

The introduction of the Act has largely been considered a positive move. “We welcome the introduction of this ground-breaking legislation that we have been campaigning for since 2015,” said Rachel Davies, head of advocacy at Transparency International UK. “Transparency over who really owns property here is vital to addressing Britain’s role as a global hub for dirty money from Russia and elsewhere. To ensure these new measures are as effective as they can be, we urge the government to close the loopholes that would provide those with money to hide ways to continue to conceal their ownership of UK property.”

Transparency concerns

The Act builds on existing economic crime laws in the UK and has been in development for a number of years. A first draft of legislation aimed at tackling secretive ownership of UK property was prepared in 2018 to address concerns that the UK was perceived as a haven for ‘dirty money’ laundered via property and other assets.

There has been a great deal of consternation around circumstances where property is registered in the name of a company or other legal entity based overseas, and a widely held belief that this opaqueness has allowed corrupt individuals and businesses to hide assets and launder money.

“In a bid to close this perceived loophole, one of the key features of the Act is the introduction of a requirement that information relating to beneficial owners is provided and kept in a central register,” explains Rachel Warren, legal director at Charles Russell Speechlys LLP. “It is intended that this will deter those who would seek to hide assets and launder money. Failure to update information contained in the register on an annual basis will be a criminal offence both on the part of the entity and every individual officer in default.”

According to Mr Hearty, while the new Act does introduce a new foreign ownership register, its other main changes to unexplained wealth orders (UWOs) and sanctions build upon existing legislation by making it easier to both introduce those measures and enforce them afterwards. “The Act is a new piece of legislation which has 70 sections and five schedules divided into three main measures,” he says. “The first is the new register of overseas entities. The second seeks to strengthen the UWO regime. And the final part has sought to amend existing legislation on UK sanctions.”

Though the Act bolsters the UK’s fight against economic crime, certain aspects have received criticism. For some, the 18-month commencement and transition period is too long and may give rise to asset flight. The government is facing growing calls to introduce transitional provisions to stop property from being sold before the register comes into force and the proceeds transferred overseas.

Furthermore, the current draft would leave the door open to companies that hold UK property claiming they have no beneficial owner, which is already a common problem with the UK’s company register. There is also a lack of clarity around how submitted ownership information will be verified.

Certainly, there is room for improvement and future refinements through additional legislation are likely. “The Act was brought in quickly because of the Russian invasion of Ukraine, so there does not appear to have been time to complete all the necessary improvements to boost the UK’s fight against economic crime,” suggests Mr Hearty. “We can expect additional legislation to introduce changes to the Companies House regime and the convoluted issue surrounding people with significant control (PSC).

“The Law Commission is due to report its findings on corporate criminal liability later this year. Recommendations are anticipated regarding the ‘identification principle’ and failing to prevent offences, which may make it easier to prosecute large corporate entities,” he adds.

However, Ms Warren expects the UK government to wait and see how the new Act works in practice before considering any further legislative changes. “Law enforcement in this area will continue to be a challenge, and since the Act has been passed, we have seen continued steps to make improvements,” she adds. “At the start of April, the CPS launched the new Serious Economic, Organised Crime and International Directorate which merges the existing International Justice and Organised Crime Division and the Specialist Fraud Division, working together with CPS Proceeds of Crime. Another new organisation, the Public Sector Fraud Authority, is being created, and should be operational by the summer.”

The introduction of the Act is a welcome step in the fight to address illicit finance and improve asset transparency in the UK. While it remains to be seen how effective the Act and any subsequent revisions will be, the reshaping of the UK’s economic crime architecture is underway.

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BY

Richard Summerfield