UK Economic Crime Act targets international Real Estate investors

Find out what the law means and how it might affect investments in the UK

February 2, 2023Real Estate
On 14 March 2022, the UK government passed the Economic Crime (Transparency and Enforcement) Act (ECA). This act introduced measures to target overseas companies and individuals investing in UK real estate as well as allowing more powers to UK institutions to target financial corruption, particularly from international sources.

The grace period for this act ends on 31 January; after this, sanctions will be imposed on those not registered at Companies House.

What is the Economic Crime Act?

Similarly to the existing Persons with Significant Control Register for registering company ownership in the UK, Overseas Entities (OE) must now register at Companies House to acquire ownership of UK property. This extends to those OE that purchased a Qualifying Estate (a freehold estate, or a leasehold of more than 7 years) in England or Wales on or after 1 January 1999.

Companies House is a UK executive agency, sponsored by the Department for Business, Energy & Industrial Strategy. One of their main roles is to register company information and make it available to the public. This means that companies registering in the UK will have their information made publicly available. It will also be easier to prosecute anyone involved in sanctions-busting.

The Land Registry will also place a restriction on the title to a Qualifying Estate which will prevent the estate from being transferred, charged or let in the future unless registration at Companies House as an OE is maintained.

The law also strengthens unexplained wealth orders (UWOs) which allow law enforcement to apply for a court order requiring someone to explain their interest in a property and how they obtained it. If that person fails to comply, law enforcement may then apply to the court for a Civil Recovery Order with the benefit of a presumption that the property should be confiscated. UWOs target people linked with serious crimes or who hold public office outside of Europe.

Ultimately, UK Land Registries will refuse to register certain property transactions (such as sales, purchases, long-term leases, and real estate security grants) unless the relevant OEs are registered.

GRI UK & Europe Club

The impact on Real Estate deals

The main impacts will be:
  • The amount of time taken to process new deals will be affected.
  • The drafting of deals should be affected, as care should be taken to include clauses on safety.
  • Some Overseas Entities may pull out of deals if they fear the implications of the new law.
  • Dispositions (the transfer, gift or sale of property from one individual to another) will be restricted for OEs.
  • There may be more difficulties for lenders.
  • Commercial lenders may apply stricter criteria to OEs.
  • The new legislation may prompt a desire to change the existing ownership structures of overseas entities to avoid or mitigate the impact. As with the regime for Persons with Significant Control, there are ways in which a transaction could be structured to avoid disclosure, and this may be a legitimate concern for many reasons for overseas investors.
For many, the main impact will be the new administrative steps for those who aim to deal with land transactions in the UK. This will lead to delays with routine transactions and with overseas entities becoming the registered proprietors of the land that they buy. Overall, the publication of the Act might result in less overseas investment in UK real estate since existing or new overseas entities might withdraw from buying or holding UK land if they do not wish to comply with the new law.

The Land Registry includes a restriction on the title of any property acquired by an overseas entity on or after Jan. 1, 1999, preventing ‘dispositions’ from being registered in England and Wales. Unless the OE is on the Register (or exempt), this prevents transfers, granting leases, and granting mortgages and charges.

Lenders and overseas borrowers will be required to register in the cases when advancing funds to acquire UK property. Otherwise, if not registered, the lender will not have their security registered, but the borrower will not be registered as proprietor. This extends to existing loans and the enforcement of lenders’ security over properties to secure repayment.

The coming months will likely present considerable challenges for those involved in transactions, and parties need to ensure that contract documents address any concerns and reflect the possible pitfalls (such as the failure to register with Companies House).

The consequences of breaking the law

The Office for Financial Sanctions Implementation (OFSI) can prosecute businesses (which may result in fines or up to 5 years in prison), even when they do not know they were breaking the law. Fines can be up to £1 million, or up to 50% of the economic resources dealt with, whichever is greater.

Importantly, OFSI can also publicly name these organisations, even without the imposition of fines.

Why does the Economic Crime Act exist?

Some sources argue that this bill comes not coincidentally in the wake of Russia’s invasion of Ukraine, and the movement of Russian capital towards countries such as the UK for fiscal security. The law also came into play at a time of an increasing number of eyes on the UK and the USA to monitor Russian activity, and in July 2022, the UK’s National Crime Agency (NCA) issued a Red Alert on techniques being used by Russian oligarchs to evade sanctions imposed following the invasion of Ukraine.

However, the UK government has been expanding its economic crime jurisdiction in recent years even before these events, and this ECA falls into this category. Many argue that the headlines around the bill are overblown to focus on Russia. 

Additionally, the bill provides additional powers to law enforcement on crypto. Hence, they are able to easily seize crypto assets which are the proceeds of crime or associated with illegal activity such as money laundering, fraud and ransomware attacks.

This year, another Economic Crime Bill is in the works in the House of Parliament, which aims to further reform Companies House’s powers and expand existing laws on crypto assets, Limited Partnerships, and some other miscellaneous changes on money laundering and terrorist financing.

Responding to the Economic Crime Act

Overseas Entities should have submitted their applications for the Register before January 31 in order to deal with UK property. The information must also be updated annually. To see the language used around the law, go to the UK government site on the Economic Crime (Transparency and Enforcement) Act 2022.

To discuss the Economic Crime Act’s impact on investments, or connect with other heads of real estate in Europe, look to attend GRI UK & Europe Reunion on February 20.

For GRI members exclusively, there is also the UK Politics Club Meeting on March 30 for diving into the current UK political and economic situation and addressing its impacts on the real estate market.

Written by Sarah Garnett