Very few of those who have read the Law Society’s recently issued guidance note “Register of overseas entities: what solicitors should know about verification” on the Economic Crime (Transparency and Enforcement) Act 2022 and the launch of the Register of Overseas Entities (“ROE”) will have found it an easy read. Moreover, the extent to which firms might want to embark on providing this service remains – as the note itself accepts – unclear. The provisions now being implemented have been talked about and planned as far back as the Companies Act 2006, but have now been rushed into force this year as a result of the invasion of Ukraine by Russia in early 2022. The Bill passed through the Commons in early March and has now received Royal Assent.
It is easier to explain the concerns that have been expressed rather than the planned measures that are intended to address them.
The UK, and the London financial markets and banking sectors in particular, are the most prominent of their kind in the World. As such the concerns of the UK being used for international money laundering activities have long been accepted. The UK also offers a more secure investment platform than often found elsewhere, in particular by making high value property holdings a particularly attractive target for those whose wealth might be more at risk at home. For various reasons the identity of those individuals, who were the ultimate beneficial owners of such properties, have often remained unclear, adding to concerns that the UK is being used to shield illegal or improper gains. Either way, this has worked to make many higher value properties unaffordable to most whilst further restricting the supply of the available housing stock, and also casting doubt on the willingness of the UK to counter international financial crime.
Such considerations have led the Law Society to express support for what is intended although at the same time voicing their concerns about the current provisions. They have also set out their fears as to the risks that the new provisions might create for those firms willing to become involved in the demand for these new legal services that will undoubtedly unfold over the coming months and years.
The essence of the new requirements is that “overseas entities” must take “reasonable steps” to identify their registrable beneficial owners and provide certain required information about them for registration at Companies House. In the event that overseas entities are unable to provide information on their beneficial owners they will need instead to provide details of their directors or other managing officers.
What will be required of the legal profession is that an overseas entity will not be able to apply to register on the ROE unless a “qualified person” has verified the information to be submitted to Companies House and has submitted a form, as set out at regulation 6 of the Verification Regulations , to do so. Solicitors in private practice will qualify as such, but not those who work in-house, but the guidance note recognises that this a service that many will be unwilling to provide in which case they will not find themselves obliged to do so.
For those who are willing to provide this service, or who feel that they have to do so given the nature of their client base, the certification process appears at first sight to be in line with the now familiar CDD processes in the AML regime. The Law Society Guidance warns, however, that there are key differences in both the main CDD processes and also in assessing who will count as a “person of significant control” or a beneficial owner. At paragraph 9.3 of their guidance, the Society state that in some key regards “existing CDD procedures will not suffice” and that there will be a need for a more extensive checking process.
The Law Society advice also does not pull its punches in relation to the risks that these new provisions represent for firms and for certain key individuals within them. They state at paragraph 1.4 of their guidance that following the guidance issued by the Department of Business Energy and Industrial Strategy (BEIS) will not necessarily guarantee legal compliance. The view is also expressed that it may be necessary to contact the SRA to check whether they might be regarded as being competent to support an ROE verification if they are not also qualified in that jurisdiction, and so therefore risking a breach of rules 3.2 and 1.4 of the Code of Conduct for Individuals. These provisions make requirements for all of the firm’s services delivered to be competent and for the solicitor to avoid being complicit in the acts or omissions of others, as they might prove to be if relaying advice received from an overseas source.
Even more directly, the Society states at paragraph 8.3 of its guidance that “No-one should make a verification statement without being satisfied that the statement is true, and backed up by reliable, appropriate and independent evidence”. Further in that same paragraph they state that firms do not need to conduct verification statements if they do not wish to do so and do not have the “requisite specific expertise or information” to do so with confidence. See also paragraph 9.2 advising that solicitors should approach verification with “diligence and caution”, and to do so on the basis of their “actual knowledge” or when acting on the basis of what they have been told by a “wholly reliable and independent source”.
For those willing to offer these services the delivery of a document that transpires to be misleading, false or deceptive will be liable to a fine, and so they could find themselves facing criminal sanctions through their negligence, while anyone doing so knowingly will potentially find themselves facing a term of upto 12 months imprisonment. The very clear undercurrent of the Law Society guidance note is to proceed with extreme caution, and no doubt the great majority of firms that have mostly or exclusively local or UK clients will choose not to provide such services. Since the guidance note also suggests at paragraph 1.7 that “extreme caution” should be applied if those firms that do provide this service are approached to perform such services for those who are not their own clients we are likely to see an advice desert developing in this regard. Alternatively, those firms that decide not to provide this service may well then have the difficulty of explaining that this is not a service that they provide, and nor have they been able to locate an alternative provider that will be willing to do so.
It should also be noted that firms willing to provide such services should check whether such activities will be covered by their existing PII policy now or on renewal, and it would be as well to check whether any additional premium might arise if they do decide to do so.
Although the roll out of these new and very complex provisions is now upon us there is still much more to follow, including the publication of a second bill before Parliament. We will continue to monitor developments and report further on this topic, and then prepare a Factsheet once we all have a clearer idea of how the new requirements will operate as a whole.