Clifford Chance

Recent events in Ukraine have seen the Economic Crime (Transparency and Enforcement) Bill fast-tracked through Parliament to receipt of Royal Assent on 15 March 2022, with a number of significant implications for reform of sanctions and the economic crime regime.

There have long been calls for reform of the existing economic crime regime (some of the proposals for which we have discussed in our previous RIFC insights posts (Law Commission to investigate corporate criminal liability laws in the UK and The Law Commission consults on corporate criminal liability reform).

A draft Economic Crime Bill was in existence for some time, but progress was slow. However, recent events in Ukraine and, in particular, public interest surrounding the assets of Russian oligarchs held in the UK has pushed this to the fore.

The new Economic Crime (Transparency and Enforcement) Act (the Act), along with its counterpart, the Corporate Transparency and Register Reform White Paper (the White Paper) have been proposed to answer these calls.

They introduce a number of measures which are aimed at increasing transparency and providing additional powers to combat financial crime. Front and centre of the Act are the creation of a register of overseas entities, to include information on overseas entities which own UK property and their beneficial owners; and provisions to strengthen unexplained wealth orders (UWOs). But there are also significant changes to the sanctions regime, and in particular to liability for sanctions breaches.

The three key areas of reform

Overseas entity registration regime

Part 1 of the Act focuses on the creation of a register of overseas entities and their beneficial owners. The provisions are designed to compel overseas entities to reveal their beneficial owners on a public register if they own land in England and Wales bought on or after 1 January 1999. UK incorporated companies are already required to provide such information for the existing Persons with Significant Control (PSC) register, so this effectively levels the playing field for overseas entities, introducing a registration requirement which was first announced by the then Prime Minister David Cameron back in 2016 but which had been slow to progress until now.

The transition period for overseas entities to register beneficial owners currently stands at 6 months. While entities that fail to register will face penalties, the practical effects for counterparties transacting with overseas entities captured by the legislation include the potential need to adapt due diligence processes and contractual arrangements to require more burdensome compliance with the various continuing duties for overseas entities under the Act.

UWOs

UWOs provide a means by which the proceeds of crime can be confiscated by recourse to civil, rather than criminal, powers. An UWO is a Court order which compels the respondent, usually a high net worth individual, to explain how an asset was acquired. Enforcement agencies, such as the National Crime Agency (NCA), can apply to the High Court for an UWO and, once made, the Court may issue an interim freezing order if it considers there to be an immediate risk of the diminution of the relevant property.

Part 2 of the Act aims to remove barriers to the use of UWOs and:

• limits costs orders against authorities which do not succeed in obtaining an UWO, unless the authority acted dishonestly or improperly;
• allows issuing an UWO more broadly to responsible officers of the respondent (such officers including directors, partners and managers, as appropriate); and
• allows an extension of the period for which an interim freezing order has effect.

Following the Act's removal of key procedural impediments, we expect to see a sharp increase in law enforcement authorities' use of UWOs as a more effective pathway to confiscate criminal assets.

This may have particular implications for those with interests in such assets, such as those with security over these assets as part of lending relationships. It remains to be seen how in practice, if at all, it will be possible to enforce such security in the event of confiscation.

Sanctions

The implementation and enforcement of financial sanctions is carried out by the Office of Financial Sanctions Implementation (OFSI) which is part of Her Majesty's Treasury. OFSI maintains the 'Consolidated List' of financial sanctions targets in the UK including all asset freeze targets and 'designated persons', as well as publishing guidance on compliance with the UK sanctions regime.

Under the Policing and Crime Act 2017, financial penalties can only be imposed on individuals or entities breaching sanctions laws where it can be established on the balance of probabilities that the person knew, suspected, or believed themselves to be in breach. Currently, entities that are majority owned or controlled, directly or indirectly, by a designated person may not be designated in their own right, so their names may not appear on the Consolidated List. However, those entities are similarly subject to financial sanctions (and those that deal with them may face sanctions for doing so). It can be more challenging for OFSI to show the requisite knowledge or suspicion in these cases.

Part 3 of the Act aims to strengthen sanctions enforcement capabilities. The Act omits the requirement for knowledge or suspicion, effectively allowing the levy of financial penalties on a strict liability basis, regardless of an individual's or an entity's intent or mental state. This approach will be familiar to those who deal with US sanctions, where OFAC regulations operate under strict liability, but OFAC provides enforcement guidelines setting out various factors to consider when assessing sanctions violations and the range of penalties. However, there has not yet been any guidance around these changes from OFSI or on how it intends to deploy its enforcement powers, absent which the change in liability could create a range of unintended and unforeseen consequences for businesses grappling with sanctions restrictions.

The Act also:

• gives HM Treasury the ability to name persons who, on the balance of probability, have breached sanctions, but on whom no financial penalty has been imposed;
• addresses additional procedural impediments to the levying of sanctions, for example, removing the need for a personal ministerial review of appealed financial penalties and the facilitation of information sharing between Government departments and the Treasury; and 
• removes the test of "appropriateness", enabling more flexibility via an urgent designation procedure. This allows for increased identification and penalisation of Russian individuals and alignment with sanctions levied in the EU, US, Canada and Australia.

The Government has already used its new sanctions powers, announcing over 370 Russian and Belarussian sanctions on 15 March 2022. The majority of these designations were enabled by the Act.

What to look out for

There are a number of potential developments to stay abreast of:

• Progress of the White Paper: The White Paper is expected to be introduced as a second economic crime bill early in the next parliamentary session, later this year. A substantial amount of the force of the reforms remain to be effected on the basis of the White Paper, which among other measures proposes:
  
  • changes to the existing role and powers of the register of companies, Companies House, to allow it to take actions such as sharing information with law enforcement, rejecting filings and querying potentially inaccurate information;
  • mandatory identity verification measures for directors and PSCs with Companies House;
  • the introduction of increased legal pathways for data sharing;
  • restrictions on corporate directors (including allowing companies to have a single 'layer' of UK-based corporate directors); and
  • restrictions on overseas agents forming UK companies.
• Second Economic Crime Bill: It is expected that the further bill will also look at other measures aimed at improving transparency and cracking down further on financial crime, including the grant of specific powers in respect of cryptoassets and restrictions on the use of limited partnerships, as well as measures aimed at encouraging businesses to carry out increased information sharing on economic crime.
• Further guidance on Russian sanctions: OFSI has updated some of its existing Russia Guidance in part (see for OFSI guidance), but some sections remain to be updated and we expect that further guidance on financial sanctions in Russia will be issued in due course.
• Further measures on Russia: A number of developments are expected, with many measures being expedited. These include:
  • Further sanctions, including a restriction on deposits by Russian nationals, are expected to be set out in further regulations. The Government has previously announced that further sanctions will be adopted as follows:
    • sanctions that will limit the amount of deposits Russian citizens (expected to be non-residents or non-nationals of the UK) can make into UK bank accounts (above GBP 50,000); and
    • sanctions that extend financial and trade measures applying to Crimea to the DNR and LNR regions.
  • The possibility of introducing emergency legislation allowing the freezing of assets held by Russian high net worth individuals who are in line to be sanctioned by the Government, in order to avoid the imminent disposal of property.
• Potential for increased enforcement action: Clearly the current climate indicates that the use of new and existing economic crime measures will be encouraged by the Government in order to support the UK's response to events in Ukraine and the actions of the Russian Government. In the longer term, these measures are intended to make it easier more generally to take action to combat economic crime.