In our article of 25 Jan. 2023 (Overseas entities - registration deadline brings new risk for law firms), we reported on the introduction of the Register of Overseas Entities (“the ROE”). Now that the deadline for registration has passed, we take a fresh look at the risk implications for law firms and consider the current approach taken by the profession to the verification and registration process.

Our earlier article provides more detail on the ROE and its requirements, but to recap briefly; the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA 2022) established the ROE. It is a register of all entities which are governed by a jurisdiction outside the UK and own land or property in the UK. As of 1 Feb., any overseas entity (OE) must be properly registered to complete a property transaction.

The Keeper must reject registration of a qualifying registrable deed unless the OE is registered or exempt from registration. All beneficial owners of the OE must be listed, and their identity verified. Failure to comply with the rules not only prevents property transactions but is punishable by fines or potentially imprisonment of the entity’s directors.

Is your client registered?

If a client or another party to a transaction is an OE, it is important to check if they need to be registered before beginning to act. If they should be registered, are they? You should also check that they have listed their beneficial owners. Check the ROE on the Companies House website (https://find-and-update.company-information.service.gov.uk/).

Failure to check the ROE at the beginning of the transaction could cost your client time and money. In the worst-case scenario, the whole transaction could be lost.

Look out for failures to register

Do not assume that an OE has complied with its registration obligations merely because the deadline has passed. The number of OEs who have failed to register entirely will of course be difficult to quantify. However, Companies House sent 57,000 notice letters to all entities considered in scope when the ROE came into effect, and have since begun enforcement procedures due to failure to register in a number of cases. There are non-registered OEs out there! They could be a party to your next transaction, so be on your guard.

Agents: to act or not to act

The Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (the “Verification Regulations”) sets out a regulated process for verification of OEs. Verification of entities and their beneficial owners must be undertaken by a UK-based agent who is registered and supervised under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Solicitors can register as agents. However, one of the most interesting takeaways since inception of the ROE is that law firms are mostly electing not to register as agents. Of over 180 currently listed on Companies House as agents, few are law firms.

There is no requirement that solicitors must carry out this function. The process is more onerous than the standard anti-money laundering requirements. Under the ECTEA 2022 there are a range of penalties for submitting incorrect information or failing to conduct the verification process properly. They include fines and, depending on the circumstances, criminal liability.

Guidance from the Law Society of England & Wales states:

“…the Law Society considers that any law firm acting as a verifier will face significant challenges and expose itself to significant risk, including possible criminal prosecution, regulatory sanction, and reputational damage.”

Check your letter of engagement

Consider whether your letter of engagement or your terms and conditions should specifically refer to the ROE. Does your client (or prospective client) know about the registration requirements? They may assume that you will deal with registration as part of a conveyancing transaction if you do not explicitly deal with this in your letter of engagement. If you are not a registered agent for verification and registration services in respect of the ROE, consider including wording in your general terms and conditions confirming that you will not provide this service. Where you know that a transaction involves an OE, you should be more explicit in your scope of work. Explain the requirements of the ROE and confirm again that you will not provide services in relation to registration. Alternatively, if you are a registered agent, your scope of work should include details of the work you will do that relates to verification and registration.

Ongoing duty to maintain registration

Remember that registration is not a one-off obligation; every OE must register and provide up-to-date details of their beneficial owners annually. It would be sensible to refer to this duty in your terms and conditions. It might also be worth including a provision in your letter of engagement, making clear that you will not be prompting the client to register each year, and that they bear responsibility for meeting the annual deadline.

Registration of beneficial owners: more to come?

The Economic Crime and Corporate Transparency Act 2023 has received Royal Assent, and once in force it will introduce some changes to the ROE. It includes a requirement for an OE to provide details of all land in the UK registered in its name, by providing relevant title numbers. The act also seeks to close anti-avoidance loopholes in relation to beneficial owners who are trustees.

Remember the RCI

The Register of Persons Holding a Controlled Interest in Land (“RCI”) was established by regulations made under section 39 of the Land Reform (Scotland) Act 2016 and launched on 1 Apr. 2022. Its purpose is to increase transparency about who actually controls land and property in Scotland, where that is someone other than the registered owner or tenant. The RCI is accessible online at https://rci.ros.gov.uk/. The transition period for complying with the requirements of registration in the RCI ends on 1 Apr. 2024. All ownerships subject to a controlling interest within the scope of the RCI must register by this date.

It is important to remember that, at present, registration in the RCI does not exempt an OE from the requirement to register in the ROE. An OE must register in both registers, assuming they meet the requirements.

Check the guidance

Guidance on the government website provides a wealth of helpful information on the ROE. The guidance can be found at https://www.gov.uk/guidance/register-an-overseas-entity.

For property transactions, The Property Standardisation Group (PSG) have published detailed guidance on the ROE, which can be found at www.psglegal.co.uk. They have also updated their resources to reflect the introduction of the ROE.

Managing the risks: action points

Managing risk around the implications of the ROE must now become part and parcel of standard risk management procedures. Make sure you have considered the following tips:

  • Train all staff to look out for involvement of OEs in a transaction and to check the register. Beware of unregistered OEs!
  • Update your terms and conditions to confirm that you will not act as a registration agent. Alternatively, if you are a registered agent, include detailed terms as to what you will and will not do. Make sure the client knows what is expected of them in terms of information provision.
  • Draft a standard wording for a scope of work where an OE is involved.
  • Where a client is a registered OE and you will be acting for them on an ongoing basis, use a diary system to prompt a check for annual registration (but make sure the client knows that registration is their responsibility).
  • For existing OE clients who have granted securities, check if they are properly registered in case of queries from lenders.

With the ROE now firmly established, and draft legislation in the offing to widen the scope of the register, it will be interesting to see how its impact develops over time. Watch this space!