Some 60% of St George Wharf Tower, Vauxhall, has overseas owners and UK legislation is trying to ensure such ownership is transparent
It is four years since the meeting in Singapore where then prime minister David Cameron made an anti-corruption speech to a gathering of world leaders. Yet legislation is still awaited to deal with what some see as the use of foreign companies to hide the true ownership of property purchased by improper or illegal means.
The extent to which this happens in practice is obviously difficult to tell; overseas investment in the UK property market is nothing new and there may be legitimate tax or privacy reasons as to why a corporate structure might be preferred. However, secrecy naturally arouses suspicion and the prevalence of offshore entities in the so-called Panama Papers has at least ensured such concerns have not been suppressed.
So what has happened since the speech? In March 2016 the then Department for Business Innovation & Skills issued a discussion paper on the matter. Following consultation with various industry stakeholders, the government's formal response was published in March 2018. The draft Registration of Overseas Entities Bill followed that July and it is expected this will be debated as part of parliamentary business this year. The government's ability to meet its self-imposed deadline for changing legislation by 2021 clearly depends on the bill's passage through Parliament. In the meantime it is worth considering what form any legislation might take and whether it will bring the required practical changes.
The bill aims to ensure that an overseas entity defined as a non-UK registered body with legal personality must become a registered overseas entity in order to hold a qualifying legal estate in land, defined as a freehold interest or lease of seven years or more.
The bill borrows many of its provisions from the Persons with Significant Control (PSC) Register, set up in 2016 by the government and requiring UK entities to provide details of the true beneficial owners of UK property. The Land Registry currently records approximately 100,000 properties under foreign ownership, around 87% of which are owned by non-UK registered entities that do not disclose the true beneficial owners. It is estimated the value of these could be several billion pounds.
Assuming the bill becomes law, any overseas entity wishing to purchase UK property that does not fall within the exemptions stated will be required to provide details of the ultimate beneficial owner to Companies House, which will then provide them with a unique identification number. That entity will in turn need to provide this number to the Land Registry when applying to register property in its name, and will be prevented from registering its interest without it.
Overseas entities already registered as proprietors will have an 18-month grace period in which they can either transfer their interest or obtain an ID number. Failure to do so will mean a restriction is placed on the title register requiring such a number to be provided before the property may be transferred or otherwise administered. The bill also proposes criminal sanctions, including imprisonment, for non-compliance.
The register is important because, as a much-coveted place for foreign investment, the UK is arguably more exposed than most countries to illegitimate financial activity and to the use of overseas shell companies to disguise this. In theory, the transparency provided by the register should encourage compliance with international law and improve the accuracy of information. When it is alleged that illegal activities may have taken place, enforcement agencies will then be better placed to conduct investigations given the accessibility of information.
"The UK is arguably more exposed than most countries to illegitimate financial activity"
All the same, concerns about the register's introduction will likely come from investors themselves who value the ability to conduct business legally but discreetly. Much of the information that the register aims to make public can already be accessed by law enforcement agencies following proper legal processes where it is suspected that opaque and complex structures are being used to disguise criminality. To that end, it is arguable that the introduction of a public register creates an additional and unnecessary layer of regulation that will inevitably discourage investment.
It is notable that in its current form the bill only requires an overseas entity to prove it has taken reasonable steps in ascertaining whether it can provide the precise information about the required level of beneficial control. Given the structural complexity of some of the vehicles used in global financial planning, this requirement may act as an easily achievable standard for those who wish to remain anonymous. Although the 25% rule suggests that entities may find it difficult to plead frustration, the same threshold dictates that not all overseas bodies will be covered by the changes. Additionally, the provisions on exempt persons are at present drafted broadly and while the actual circumstances in which these exemptions apply are likely to be limited, the draft legislation gives no indication of the criteria that will need to be fulfilled.
Criticisms of the current PSC Register, particularly in relation to its lack of regulation, ought to be heeded before any bill becomes law. Although the overseas register will be available for public inspection, Companies House will only collate the information rather than verify its accuracy. To the extent that reliance is placed on information given in good faith, the register is vulnerable to discrepancies and, in the worst cases, abuse. The bill's criminal sanctions for non-compliance may act as a deterrent, although the expectation is that these will be reserved for the most serious cases. Initial findings of inaccuracy in the register will probably be dealt with under the 14-day notice procedure requiring remedial action by the entity in question – but this action is unlikely to deter those seeking to circumvent the law.
The final form that the bill takes and the impact it will have once law are awaited with interest. Whether public registers will eventually become an internationally required standard will depend to a large extent on the government's commitment to encourage the Crown dependencies and British Overseas Territories to follow suit, given that their tax and company laws have historically been a matter of moral debate. Whatever the developments in this area, there is little doubt that we are moving towards transparency rather than privacy.
David Roberts is an associate in the real-estate team at Russell-Cooke email@example.com
Related competencies include: Legal/regulatory compliance