Ownership Beneath: A Beneficial Ownership Register in 2022
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In his 1765 Commentaries on the Laws of England, William Blackstone wrote that lawyers are ‘afraid to look back to the means by which land is acquired’, being content instead to rely upon present possession. A similar argument can made about the Land Register today. While it is possible to pay a small fee to identify the freeholder of a registered plot, how the land was acquired, and its beneficial ownership, are conventionally hidden from view.
Recent world events have renewed our focus on who owns land and how they came to acquire it. The new 2022 Economic Crime (Transparency and Enforcement) Act, draws on the long promised draft Registration of Overseas Entities Bill first published in 2018 but never brought into force.
The new Act sped through Parliament, passing the Commons in a single day on 7th March 2022, receiving Royal Assent a week later after valuable revisions in the Lords. Once fully in force, it will facilitate the three main mechanisms to tackle disputed finance: (1) sanctions; (2) unexplained wealth orders and (3) identification of beneficial ownership.
Sanctions are the swiftest, the Act now strengthening the UK’s regime by removing the ‘appropriateness’ test in identifying who can be targeted as well as introducing an ‘urgent procedure’ to mirror sanctions imposed on individuals or companies elsewhere.
Unexplained wealth orders shift the burden of proof from prosecutors to owners, requiring them to prove that the money used to purchase the property was legitimately obtained. Introduced in 2017, so far only nine prosecutions have been brought in respect of four cases, significantly under-shooting the initial estimate of 20 cases a year. The risk of costs orders, and the widely-acknowledged under-funding of the National Crime Agency, explain these low numbers. The new rules will, once brought into force, prevent courts from making costs orders against investigators unless they are found to have acted unreasonably, dishonestly, or improperly during the proceedings. Such changes, alongside a new annual report, should encourage more unexplained wealth orders, revealing greater understanding of ownership beneath.
The third way the Act addresses disputed finance is to introduce a Register of Overseas Entities, where ‘overseas entities’ will be required to register, receiving an Overseas Entity ID number. The new register will require ‘overseas entities’ to take ‘reasonable steps’ to identify their ‘beneficial owners’ if the entity has bought a ‘qualifying estate’ (a freehold or lease of more than seven years) in England and Wales since 1 January 1999 (with similar requirements for Scotland and Northern Ireland). Revealing beneficial ownership might entail revealing interests under a trust, how the shares are held in a corporate vehicle, or a combination of both.
One aim of the 2022 Act is to prevent beneficial owners from using a combination of companies and trusts to hide their ownership. Its definition reflects modern formulations, echoing that used in the 2016 Register of People with Significant Control (PSC register) where beneficial owners are broadly defined as including people who hold more than 25% of the shares or voting rights of the entity, control the board of directors, or have significant influence or control over the entity.
The Act contains some important exceptions to the new rules including where beneficial ownership is sliced into shares lower than 25% to avoid disclosure, or, even more critically, ownership arrangements use nominee directors. The ban on the use of nominees have long raised concern, the OECD concluding in 2021 that use of nominee directorships can ‘be viewed as a risk indicator for criminal activity and professional enablers’. MPs also expressed concern in the Bill’s debate that it should not be possible to avoid registration by having a nominee ‘at the end of the trail’. More reforms are needed here.
Failure to register as an overseas entity will have both criminal and land law consequences. The 2022 Act gives overseas entities six months to register once the new rules come into force, enforced with criminal penalties, including fines of £2,500 per day or up to five years in prison. The land law sanctions may be even more persuasive. The Act introduces a new Schedule 4A to the Land Registration Act 2002, providing that if an overseas entity has been registered as the proprietor of a ‘qualifying estate’, then until the entity is itself registered on Companies House’s register, the Land Registrar must enter a restriction on the title. This restriction will prohibit (subject to a few exceptions), the registration of key dispositions, notably the transfer of a freehold, acquisition of a lease of more than seven years, or the grant of a mortgage.
Landowners cannot even sell properties before these parts of the Act come into force. Transitional provisions are rarely this exciting but following an Amendment proposed in the House of Lords, the Land Registry must act even before the end of the transitional period.
While an overseas entity may calculate that limited prosecutorial resources inhibit criminal penalties for non-registration, this bureaucratic sanction inserted in land registration will catch all types of property: commercial and retail as well as residential. HM Land Registry already has ownership data showing which estates are owned by entities based overseas. It is a simple process to check any proposed transaction against this list so that if the overseas owner does not have the requisite ID number, any sale, long lease, or mortgage cannot operate at law, only in equity, rendering the property significantly less valuable.
While trusts may be rather opaque under the new Act, if a trust owns UK land either itself or through a nominee or bare trust arrangement, it must register with the UK Trust Registration Service (TRS), providing the tax office (HMRC) with details of the beneficial owners. The TRS, set up to comply with EU Money Laundering Directives, uses a slightly different definition of beneficial owners, including the trustees, settlor, named beneficiaries and those beneficiaries who have benefitted from the trust, as well as any person who has significant influence or control over the trust.
When the TRS first came into effect in 2017 the obligation to register was linked to tax liability, so that only UK trusts submitting tax returns needed to register. Its scope was significantly expanded by the 2020 implementation of the 5th Money Laundering Directive (which the UK government had undertaken to implement post-Brexit) so that all UK express trusts (subject to certain exceptions) and non-UK trusts which own land in the UK now have to register. Its function is both to ensure that trusts are being taxed properly as well as to collect information on beneficial ownership.
This register is a response to trusts’ long history of privacy and wealth management. Back in 2019, the Joint Select Committee recommended that the TRS be publicly accessible, to prevent trusts being used to launder money. The Government declined to do this, citing the UK’s high rating for anti-money laundering regime from the Financial Action Task Force (FATF). Only those who can prove a ‘legitimate interest’ in furthering work to counter money laundering or terrorist financing activity can access the TRS’s information.
Finally, it is worth noting an inherent limitation on the utility of the TRS. Whilst trustees are obliged to disclose named beneficiaries, most overseas trusts define their objects by class rather than name. These classes can be defined in extremely wide terms, such as anyone in the world other than the settlor, or even a ‘person’ who at some future point is ‘added to a class of beneficiaries’. Obscuring ownership is baked into the very idea of trusts and tax authorities have grappled with this problem for decades without finding a solution (HMRC prefer to tax a trust as if were a legal entity such as a company rather than searching for the true ‘beneficial owner’). The new focus on beneficial property ownership may run into similar problems.
Private wealth managers based in the UK will be busy advising their clients on how to comply with, or avoid, the new rules. As Bernard Rudden pointed out: ‘What the law does well is blind its servants. Judges, practitioners, and even jurists grow so accustomed to its rituals that they do not see how deeply weird they are’. Legal concepts, particularly beneficial ownership, are remarkably effective at managing wealth.
Understanding trust property as wealth, rather than as a thing, fungible rather than material, makes it easier to separate use above from ownership beneath. Today, there is a growing interest in understanding this question, including an appreciation of the professional ethical obligations on lawyers, accountants and others in providing corporate services and advice.
As academics we are keen to connect with colleagues – academic, commercial or activist – to create a network of research and understanding of these issues. We hope to organise a one-day workshop and networking event in Oxford in June 2022. If anyone is interested in joining us at an informal event, or becoming part of a network more generally, we would be delighted if you would get in touch (to email@example.com or firstname.lastname@example.org).
How to cite this blogpost (Harvard style):
Douglas, S. and Layard, A. (2022). Ownership Beneath: A Beneficial Ownership Register in 2022. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2022/05/ownership-beneath-beneficial-ownership (Accessed [date])