According to reputable media sources, many offshore firms have missed the deadline of 31 January 2022 to declare UK owned properties in the government’s new Register of Overseas Entities (ROE). In an effort to improve transparency regarding offshore property ownership and to help block an estimated £100 billion of illicit financing channeled through the UK, often via property, Companies House set up the ROE in August 2022 through the new Economic Crime (Transparency and Enforcement) Act of 2022 which was fast-tracked after Russian’s invasion of Ukraine.

The ROE requires any anonymous foreign buyers of UK property to disclose the beneficial ownership of the property to Companies House. The ROE applies to any overseas or foreign entity that is the registered owner of a freehold estate or that holds a lease for a term of more than seven years on or after 1 January 1999.

Creating context

According to The Financial Times 19,510 firms have recorded their offshore properties in the ROE out of an estimated 32,440 and around a third (5800) of the beneficial owners are firms and not individuals. The register showed that the majority of offshore entities, which owned UK property, mostly in London, were based in the British Virgin Islands, followed by Jersey and the Isle of Man.

The Financial Times also reported that according to the UK government, the register has managed to expose criminals using offshore firms to launder money. They shared an example which included the “crypto queen”, Ruja Ignatova, who is currently on the FBI’s mostwanted list for her pyramid scheme called One Coin. The register showed that she owns a four-bedroom penthouse in London, worth an estimated £13.5 million. Also, it has been widely reported that Russian oligarchs own a lot of property in the UK, particularly in London, often via overseas companies and with the true ownership frequently opaque.

Addressing possible loopholes

The Guardian indicated that at least 2400 firms have not revealed their beneficial ownership because they are offshore-based trusts. The UK government provided an exemption to trusts when the public register was introduced although the owners of trusts are still required to provide their details privately which will be available to Her  and Customs (HMRC).

The UK government clearly states on their website that under paragraph 6 of Schedule 2 to the new economic crime bill that a person (“X”) is a beneficial owner of an overseas entity or other legal entity (“Y”) if one or more of the following conditions are met: X holds, directly or indirectly, more than 25% of the shares in Y. This still leaves options to conceal ownership via professional trust firms acting as nominees and via shared ownership which means all shareholders have below 25% shareholdings. The question then becomes: “Why is the threshold set at 25%? This could easily result in having five 20% shareholders.

The Financial Action Task Force (FATF) guidelines does not specify the required threshold but uses 25% as an example. FATF states that in determining the correct threshold countries should consider the ML/TF risk identified for the various types of legal persons, or the minimum ownership thresholds established for particular legal persons (per commercial or administrative law). Typically,enhanced due diligence requires any UBO holding with 10% or more ownership, ina company, to be identified.

According to The Guardian, the number of overseas individuals who owns property had increased by 250% during the last decade. This resulted in overseas-based individuals in England and Wales owning more than twice as many titles as held by offshore firms and these individuals act as nominees for other people which means that they become “offshore shell people’’ who are doing exactly what shell companies are doing. Although their identities might be known to HMRC, as part of the new requirements, the public will not be informed about ownership. In the article from the Guardian, Oliver Bullough remarked that “In short, the battle is not won. If we truly want transparency of property ownership, we have to open up trusts, too.”

A ripple effect

Owning properties through offshore firms is legal and some people will have legitimate reasons for using them, but regulated firms must be extremely careful notto facilitate the breaking of any restrictions or sanctions placed on individuals and entities. The newly established ROE might also create a rush by some Russian oligarch to try and sell their UK properties to avoid their true identities being revealed. This adds additional pressure to the anti-money laundering (AML) functions of related industries.Therefore,in addition to financial services firms, other notable industries could also be impacted, and these include digital assets (crypto), real estate firms, law firms, auction houses and high-value goods sellers and accountancy firms.

In practical terms, actions that will be required include putting these sanctioned individuals and entities on ‘’do-not-trade’’lists and blocking them from transactional systems. Furthermore, firms must ensure that payment systems trap all transactions that involve (even as third parties) these individuals and entities and make sure that the origin and destination of all funds flowing through correspondent banks and third-party payment partners do not involve sanctioned individuals and entities.

How can we help?

With more than 20 years of financial crime compliance experience, Lysis Group can assist firms in a wide range of industries with the following:

·       Keeping firm-wide risk assessments up to date against its risk appetite.

·       Updating procedures, controls, and systems to reflect revised policies and train compliance personnel on the changes.

·       Keeping sanction lists up to date.

·       Assisting firms to identify/apply appropriate minimum thresholds, based on the ML/TF risk identified, to capture potential ML/TF risks.

·       Running customer sanction screening at least daily and resource up to managed alert levels.

·       Screening transactions in real-time and resource up to managed alert levels.

·       Increasing the nature of business checks and transaction-level scrutiny of firms who might be affected by the property transfer chain.

·       Enhancing PEP lists and increasing resourcing to deal with more PEP hits and on-going due diligence and monitoring on larger numbers of high-risk PEPs and other high-risk customers.

·       Enhancing a firm’s ability to identify that a customer is domiciled in, operates substantially in,is a citizen or is otherwise substantially connected to a sanctioned entity because data might be deliberately falsified.

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