The Economic Crime Act 2022…A Headache For The Kleptocrats?…

Corrupt Elites and Kleptocrats: How far can the Economic Crime (Transparency and Enforcement) Act of 2022 go?

Having been on the table since 2016, on 14 March 2022 the Economic Crime (Transparency and Enforcement) Act of 2022 (“the Act”) received Royal Assent only 14 days after it was introduced into the House of Commons in response to the Russian invasion of Ukraine.[1] The objective? To tackle illicit financial activity flowing from Russian oligarchs and kleptocrats into the ‘destination of choice’ for money laundering – the UK. As explained by Transparency International, “in a kleptocratic system such as today’s Russia, going after the elites can be meaningful. The vast wealth that Russian kleptocrats have amassed – and continue to enjoy – has helped President Putin tighten his grip on power, exert illicit influence over the affairs of other nations and embolden his geopolitical ambitions.”[2]

The Act has 3 primary components: (i) the introduction of a Register of Overseas Entities (“ROE”); (ii) the expansion of the scope of Unexplained Wealth Orders (“UWO”); and (iii) amendments to the UK’s sanctions regime. The Organised Crime & Corruption’s Reporting Project has found over $17.5 billion in Russian assets, and counting, concealed worldwide.[3] The question remains as to how effective each measure will be in tackling those assets hidden in the UK.

Part I: Register of Overseas Entities

At a glance:

1. Introduction of the ROE: The aim of the register is to increase transparency over property ownership in the UK. Overseas entities with a “relevant interest” in UK land (a freehold or leasehold title that is longer than 7 years in England and Wales) will be required to identify their registrable beneficial owners and register them at Companies House. The requirement applies retrospectively to overseas entities that purchased property on or after 1 January 1999 in England and Wales, or on or after 8 December 2014 in Scotland.

Overseas entities include any body, corporate, partnership or other entity governed outside of the UK (including Jersey and Guernsey). A beneficial owner includes a person who: (i) holds, directly or indirectly, more than 25% of the shares or voting rights in the foreign entity; (ii) has the right to appoint or remove a majority of the board of directors of the foreign entity; or (iii) otherwise exercises significant influence or control over the foreign entity.

2. Restrictions: Restrictions will be imposed on titles at the Land Registry to prevent non-compliant overseas entities from dealing with their properties unless it can be shown that the entity has complied with the Act or is exempt. If land caught by the Act is disposed of after 28 February 2022, the entity will be required to include information related to the disposition when registering at Companies House.
3. Enforcement: A failure to comply with the registration requirements constitutes a criminal offence and is punishable by a fine. For continued contravention, a default fine of up to £2,500 per day may be imposed. The Act creates other offences, the most serious of which is transferring a property in breach of the registration requirements, which carries a maximum sentence of five years’ imprisonment or a fine.

Commentary

Whilst the introduction of the ROE is welcome, the question of how effective the provision will prove to be is open to debate; it is not yet in force and when it is (at the discretion of the Secretary of State), a six-month transitional period will begin.

The effectiveness of the ROE rests upon the powers of Companies House to verify incorporating information, and to hold people and entities to account if false or incomplete information is provided. Critics note that Companies House is at its heart a recording organisation, lacking in the resources, staffing and expertise to carry out these necessary verification processes.[4]  Unless reformed, the new ROE could have little impact. In good news, a White Paper has been published outlining plans to reform the organisation with a second Economic Crime Bill to be put forward at the next Parliamentary sitting.[5]

Further, the Act has loopholes, for example, it allows individuals to conceal ownership of land through nominee agreements. Only the identity of the beneficial owners of the company need be revealed; it doesn’t necessarily follow that the owner will be the same as the person who ultimately benefits from the land.

Lastly, whilst the new rules will prevent a property from being sold until the entity is registered, the entity or, indeed, a company further up the chain, may be sold, thereby allowing the actual beneficiary to realise the value of the property. Moreover, the register only need be updated annually, so it may be a significant period of time before the change in ownership is discovered and recorded, undermining the very purpose of the Act: transparency.

Part II: Unexplained Wealth Orders

The Act has amended the UWO provisions contained in Part VIII of the Proceeds of Crime Act 2002, which is intended to facilitate increased numbers of UWOs, of which only 9 have been obtained in relation to 4 cases since their introduction in 2018.

1. Grounds: The Court has an alternative test available to it for granting a UWO: where there are “reasonable grounds for suspecting that the property has been obtained through unlawful conduct”, regardless of whether the “income requirement” is met.
2. Categories: “Responsible officers”, including a director, manager or partner of an entity, may now also be required to provide a statement or produce documents in response to a UWO, allowing information to be gathered from those who control the property in question rather than hold it.
3. Time limits: Where an interim freezing order (“IFO”) is made alongside an application for a UWO, enforcement agencies can apply to have 186 days, instead of 60 days, in which to decide whether to launch further investigatory or enforcement action before the IFO expires.
4. Costs: A Respondent who has successfully discharged a UWO may only be granted costs where an enforcement agency has acted: (i) unreasonably in making or opposing the application for a UWO; or (ii) dishonestly or improperly in the course of the proceedings.[6]

Commentary

It is plain that UK enforcement agencies have a substantial toolbox at their disposal to investigate illicit financial activity; these amendments make it significantly easier to gather information through a UWO.

In respect of (3) above, where voluminous amounts of information are provided and further lines of enquiry are required, this provision will certainly be of assistance. However, some may take the view that being granted additional time to investigate is not particularly helpful if the evidence is retained in another jurisdiction and co-operation between the UK and law enforcement in that jurisdiction is lacking.

Further, as was the case in National Crime Agency v Baker [2020] EWHC 822 (Admin), [7] following a failed bid to obtain a UWO, the NCA was reportedly ordered to pay £1m in costs, nearly a third of its International Corruption Unit’s budget.[8] The cost-capping provision may well incentivise the pursuance of UWOs by reducing the risk of incurring significant costs. However, there is no doubt potential for unfairness where Respondents challenging a meritless UWO are likely to incur steep costs as a result.

Part III: Sanctions

In brief, the key amendments are as follows:

1. Urgent procedure: A person, or a defined group of people, may be sanctioned if: (a) that person is already subject to sanctions under the corresponding test to that of UK in the US, Australia, Canada or the EU; and (b) it is believed to be in the public interest. The listing remains in force for 56 days, by which point, for the designation to continue, it must be established that the person is “involved” in the relevant sanctionable conduct.
2. Proportionality: The UK Government will no longer need to consider that a designation is “appropriate”, having regard to the “likely significant effects” of the designation on that person. Now, the Government need only have reasonable grounds to suspect that a person is involved in, or connected to, a sanctionable activity.
3. “Naming and shaming”: Where the Office of Financial Sanctions Implementation (“OFSI”) exercises its discretion not to impose a monetary penalty, but it is satisfied on the balance of probabilities that a person has breached a prohibition, or failed to comply with an obligation, that person may be publicly identified in its reports.
4. Penalties: The pre-existing regime concerning penalties was that, when imposing a fine, OFSI had to be satisfied on the balance of probabilities that a person in breach of the relevant regulations had knowledge or reasonable cause to suspect their activity breached those regulations. S. 54 of the 2022 Act removes this test, replacing it with strict liability.
5. Challenging designations: The Act removes the ability of the Court to award damages for claims relating to sanctions where the Government has acted negligently. Damages where the Government is found to have acted in bad faith remain, but are now capped.
6. Information-sharing: Other government departments, agencies and relevant bodies are now authorised to share information proactively with the HM Treasury to facilitate OFSI’s functions.

Commentary

Long-standing concerns continue over resourcing and the OFSI’s capacity for enforcement. These concerns are particularly acute as the Act makes no provision for increased agency funding.  Notably absent from the final enactment is a draft provision (NC24) requiring the Home Secretary to report on whether the Government has the necessary resources to meet its increased obligations.[9] Further, OFSI has only imposed six penalties worth approximately £21 million since its inception in 2015. It currently has 37.8 full-time employees at its disposal, whilst its US counterpart (the Office of Foreign Assets Control) employs over 200.

The penalty-related provisions no doubt will make it quicker and easier for OFSI to hold people and firms to account and provide a greater incentive to comply with regulations. Yet now that ministerial review of penalties is no longer required, and the previous triennial requirement to review and report on designations has been lifted, there will naturally be less time spent on scrutiny, safeguards and debate.

According to the Briefing Papers, the urgent procedure aims to help the Government to align its sanctions regime with that of its allies at speed.[10] There is no doubt that the new provisions can achieve this objective; it led to 370 Russian individuals being listed mere hours after the Act came into force. However, the new procedure serves to highlight the reliance that the UK government has on other jurisdictions, such as the US, to identify sanctionable targets, and the lack of prioritisation given to collecting and developing our own intelligence as to kleptocracy and its impact in the UK.[11]

The new Combatting Kleptocracy Cell

Alongside the Act, the UK Government announced the establishment of the Combatting Kleptocracy Cell in the National Crime Agency. Its primary focus will be on investigating sanctions evasion and high-end money laundering that reach the threshold for prosecution.[12]

Commentary

The announcement of the Kleptocracy Cell was somewhat surprising given that the NCA houses both the International Corruption Unit, tasked with a mandate to investigate “money laundering in the UK resulting from the corruption of high-ranking officials overseas”, and the International Anti-Corruption Coordination Centre. It raises the question of why the Government has decided against investing in existing units rather than adding yet another to the NCA’s roster. Whilst the Cell has demonstrated its effectiveness in the recent seizure of a £38 million superyacht, Phi, owned by an (unnamed) Russian businessman and docked in Canary Wharf, the issue lingers over whether the Cell is merely “smoke and mirrors”, designed to obscure the on-going lack of funding and a resultant lack of prosecutorial agility and capacity.[13]

The former Director General of the NCA is reported to have said that the agency requires £2 billion to address serious and organised crime properly and, despite the complexity of its mandate, most recent figures show that the NCA has only 118 staff to keep it afloat.[14] As Tom Keatinge put it in his recent Oral Evidence to the Treasury Committee, the Unit should be properly funded so as to investigate “where this money is, how it is operating, to what extent it is undermining democracy in this country and to what extent it is being used to buy influence. These are all questions we cannot answer in this country.”[15]

Conclusion

As put in a Commentary published by the Royal United Services Institute, the real value in the Act is its deterrent effect, in that “if properly policed, future generations of criminals and kleptocrats may think twice about sequestering their illicit wealth in the UK property market or using UK companies in money-laundering schemes”.[16] While the legislative reforms established in the Act are welcome, substantial progress towards addressing and eradicating illicit funds that have found a home in the UK is unlikely to be made without significant additional funding and a commitment to and prioritisation of enforcement. For maximum effectiveness, further legislative measures, such as long-overdue reforms to Companies House and strengthened oversight across the private sector of compliance with anti-money laundering regulations, are integral. It is fair to say that whilst headline-grabbing sanctions measures may give the impression of progress, it is not enough; all the tools in enforcement agencies’ toolbox need to be effectively deployed.

Brendan Kelly QC and Ella Ripper

 [1] Economic Crime (Transparency and Enforcement Act) 2022

[2] https://www.transparency.org/en/news/countering-russian-kleptocrats-wests-response-to-assault-on-ukraine

[3] https://www.occrp.org/en/asset-tracker/

[4] https://hansard.parliament.uk/Lords/2022-03-09/debates/70AD4617-20E7-4EF6-A69F-50EE4F3F1EF9/EconomicCrime(TransparencyAndEnforcement)Bill

[5] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060726/corporate-transparency-white-paper.pdf

[6] https://publications.parliament.uk/pa/bills/cbill/58-02/0262/en/210262env2.pdf

[7] https://www.judiciary.uk/wp-content/uploads/2020/04/Approved-Judgment-NCA-v-Baker-Ors.pdf

[8] https://www.thetimes.co.uk/article/budget-cuts-leave-corruption-investigators-massively-outgunned-by-oligarchs-kmv5jlgdk

[9] https://publications.parliament.uk/pa/bills/cbill/58-02/0262/amend/economic_rm_cwh_0304.pdf

[10] https://commonslibrary.parliament.uk/research-briefings/cbp-9486/

[11] https://rusi.org/explore-our-research/publications/commentary/dont-expect-sanctions-fix-uks-systemic-illicit-finance-problems

[12] https://nationalcrimeagency.gov.uk/who-we-are/publications/591-sars-in-action-march-2022/file

[14] Ibid, 4

[15] https://committees.parliament.uk/oralevidence/9834/html/

[16] https://www.rusi.org/explore-our-research/publications/commentary/economic-crime-act-2022-starting-point-not-end