Introduction

This month, the Department for Business Innovation and Skills published a discussion paper seeking input on proposals to introduce greater transparency in respect of certain foreign companies. In broad terms, the proposals seek to bring foreign companies that hold English or Welsh real estate, or that intend to bid for UK Government contracts, under a similar beneficial ownership disclosure regime (“the Regime”) to that being introduced in respect of domestic companies in June this year by Part 7 of the Small Business, Enterprise and Employment Act 2015 (“the Act”).

An example of one such proposal under consideration is to place a requirement upon foreign companies that already hold English or Welsh real estate to disclose their beneficial ownership structure in order to obtain a unique identification number that must then be provided to the Land Registry. Failure to do so may prevent that company from subsequently being able to sell or mortgage that real estate.

It is hoped that these proposals, if realised, will make further inroads in the Government’s fight against global fraud and money laundering.

The New Regime for Domestic Companies

It has long been known that savvy fraudsters often hide or launder their ill-gotten gains by making use of corporate entities, their ownership of which is disguised via a network of nominees, trusts, or corporate agents. So common is this practice that the English Courts, both civil and criminal, have developed tools and remedies to tackle this problem. However, prosecutors and victims of fraud still face significant obstacles when seeking to uncover the identity of a company’s real owner, and are inevitably on the ‘back-foot’ when it comes to taking steps to obtain such information.

This may be set to change when certain provisions of the Act come into force in June this year. Amongst other things, Part 7 of the Act introduces a new Regime under which UK registered companies will be required to make available the details of anyone exercising significant control over the company at Companies House, effectively requiring public disclosure of the identity of the company’s ultimate beneficial owner or owners. “Significant control” means holding or controlling more than 25% of the company’s shares or voting rights, or having the power to appoint or remove a majority of the board. The register will include similar details to those a company is already required to hold on its register of directors, along with a description of the nature of that person’s control over the company.

Further, under draft proposals contained in subordinate legislation – The People with Significant Control Regulations 2016  – companies will be under an over-arching duty to take reasonable steps to find out if anyone is a registrable person exercising “significant control”.  Failure to respond to the company’s enquiries will give the company the ability to summarily impose sanctions on any persons exercising “significant control” if they do not comply with their disclosure obligations (including loss of voting rights, amongst other restrictions). Non-statutory guidance has been provided for companies in this respect in order to understand their obligations.

Most importantly, there will be criminal sanctions for the company its officers, and those persons exercising significant control, if they do not comply with the new rules.

The UK’s legislation is thought to go beyond the requirements of the EU’s Fourth Money Laundering Directive (“4MLD”), which requires all Member States in impose a similar regime on corporate entities in their jurisdiction. In particular, whereas the 4MLD only requires beneficial ownership information to be kept on a central register available to certain public bodies and those that can demonstrate a “legitimate interest” in accessing the information, the UK legislation will make such information available to the wider public as well.

The Rationale for Extending the Regime to Foreign Companies

The discussion paper sets out the rationale for introducing requirements that will promote greater transparency in relation to the beneficial ownership information of foreign companies:

“As with UK companies, the overwhelming majority of foreign companies contribute productively to the UK economy, abide by the law and make a contribution to society. The popularity of the UK for overseas investment is a reflection of our economic security and stability. But there are a small number of exceptions and the Government wishes to address that.”       

However, while the Government does not rule out extending the Regime to cover foreign companies engaged in other economic activities in the UK, the current proposals are targeted only at those foreign companies that hold (or seek to hold) English or Welsh real estate or intend to bid for UK Government Contracts:

Property can provide a convenient vehicle for hiding the proceeds of crime. A recent study found that a quarter of solicitors firms surveyed had experienced clients attempting to use property transactions to launder money or commit fraud…

Between 2004-2014, over £180m worth of property in the UK has been investigated by UK law enforcement as suspected proceeds of corruption. Moreover, over 75% of these properties use offshore corporate ownership. This is believed to be the tip of the iceberg in terms of the scale of the proceeds of corruption invested in UK property through offshore companies…

Public procurement of goods and services in the UK amounted to £242bn in 2013/14, which accounted for 33% of public sector spending. Obtaining more complete beneficial ownership information on foreign companies could have a number of potential benefits including: Enhancing transparency of beneficial ownership information of foreign companies • ensuring that the Government receives the best value for money on behalf of tax payers, • ensuring that legitimate businesses participating in public contracting are treated fairly, and • preventing corrupt individuals and organised crime laundering the proceeds of their crime through public contracts.”

The Proposals for Foreign Companies (“the Extended Regime”):

The Government’s starting assumption is that the obligations placed on foreign companies should be broadly similar to those being placed on UK companies. Three options are identified in respect of the management of the foreign companies beneficial ownership register: the establishment of a further register maintained by Companies House; creation of a new register operated by another independent public body; or by a private sector organisation. It is envisaged that in all three cases the registered foreign company would be provided with a unique identifier number, enabling it to purchase real estate in England or Wales or help facilitate participation in UK Government public contracting.

The paper goes on to discuss how an Extended Regime might operate, for example:

  • Property registration: With regard to domestic companies, by June 2016 the authorities and public will be able to cross-check the beneficial ownership and control of a company with the real estate it owns recorded at the Land Registry. It is hoped that similar transparency can be achieved in the case of property owned by foreign companies: a foreign company will only be able to register its ownership of English or Welsh real estate by providing the Land Registry with a unique identification number obtained from the foreign companies beneficial ownership register. Further, as mentioned above, to cover those existing properties owned by foreign companies, the registered proprietors of up to 100,000 titles will be required to register in order to obtain a unique identification number and then provide it to the Land Registry, or face sanction.
  • Public Procurement: Under the current laws governing public procurement, at least for large projects, bidders are already required to provide certain information about their beneficial owners, in particular to flush out whether they are liable to disqualification from the process on certain prescribed grounds. A mechanism will be required to keep up to date information that has been provided by bidder companies to contracting authorities. This may be achieved, for example, by including a termination clause in contracts to cover this situation and to cover where the information supplied that led to the contract award being inaccurate.
  • Equivalence: Foreign companies incorporated in jurisdictions which already have an accessible central register of beneficial ownership information (for example those Member States that implement the 4MLD in the same way as the UK) may be exempted from providing similar information to a UK foreign company beneficial ownership register, provided that a similar unique identifier can be provided that enables a UK authority or third party to verify the beneficial ownership information of the company on that foreign central register.
  • Enforcement: It would obviously be more difficult to enforce civil and criminal penalties for failure to file information with UK authorities as foreign companies are unlikely to have officers in the UK, and it will be more difficult to verify their information. Alternative or additional methods of enforcement will need to be considered, for example the imposition of sanctions linked to the specific activity that the company needs to register for (e.g. restrictions on the company’s ability to purchase new property or to participate in public contracting).

Comment

The discussion paper suggests that by extending the Regime to cover foreign companies, there will be benefits not only for UK public authorities but also for UK private enterprises, which will benefit from the greater transparency generated by the Extended Regime in respect of their own dealings with foreign companies; and the wider international community and developing economies, which will benefit from the stifling effect that the Extended Regime will have on international fraud and corruption.

From the lawyers’ perspective, an Extended Regime is undoubtedly an attractive proposal; vast amounts of time and money may be saved in investigations and Court proceedings where there exists a reliable register of foreign company beneficial ownership which can be interrogated for the purposes of unwinding fraud and identifying those responsible. However, determined fraudsters who have committed serious financial crimes are unlikely to be phased by the need to tell one further lie to Companies House in order to allow them to operate in the UK in secret. Indeed, it is foreseeable that in cases of fraud, where the veracity of information is already doubtful, the only way to verify the information kept on a foreign company beneficial ownership register would be to engage in the costly and time consuming exercises already undertaken to prove that information at source. Moreover, unless the sanctions prescribed by any Extended Regime can be effectively enforced, the proposed measures may have no deterrent effect upon would-be fraudsters sizing up their options.

That said, an Extended Regime would represent a positive step forward on any view. It will, if nothing else, signal a further tightening of the screws on fraudsters and provide an example of the pro-active approach being taken by the UK Government to combat international fraud. The potential failings can and will be scrutinised and improved upon over time. As such, the proposals set out in the discussion paper should be warmly welcomed.