Draft Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023

Kevin Hollinrake Excerpts

Monday 22nd May 2023 General Committees

[The Parliamentary Under-Secretary of State for Business and Trade (Kevin Hollinrake)]

I beg to move,

That the Committee has considered the draft Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023.

It is a pleasure to speak with you in the Chair, Dame Angela.

The regulations, which were laid before the House on 26 April, form part of a series of secondary legislation needed to effectively implement the register of overseas entities. The register was created under part 1 of the Economic Crime (Transparency and Enforcement) Act 2022, which I will refer to as “the Act”.

The register will help crack down on dirty Russian money in the UK and corrupt foreign elites abusing the openness of our economy. Overseas entities owning or buying property or land in the UK must give information about their beneficial owners or managing officers to Companies House. Law enforcement agencies now have a wealth of new information to help them track down those using UK property or land as a vehicle for money laundering.

The register went live on 1 August last year, with the deadline for registering set for 31 January this year. There has been a high level of compliance, with more than 27,900 overseas entities registering to date. Entities that have disposed of their land are required to provide statements with information about their beneficial owners and details such as title numbers. More than 750 have provided details to Companies House, having disposed of all their interests in land before the end of the transition period. That means that just under 29,000 entities have complied with the requirements.

Although that likely leaves a few thousand entities still to register, some of them are believed to have been dissolved or struck off, and others have not kept their address details up to date with the land registries. That means they might not have received the letters that have been sent to them so far by Companies House. I know that Members want to be reassured that compliance and enforcement action is being taken. I want to reassure them that case preparation takes time, but is happening.

Companies House continues to work to increase compliance even further and is actively preparing cases for enforcement action. Any overseas entity that has failed to register is already restricted from selling, leasing or raising charges on the land it owns until it registers. Overseas entities are also unable to purchase any new UK land without registering. These are novel and severe sanctions—indeed, the most severe in the world.

It is worth reminding hon. Members that when the draft Registration of Overseas Entities Bill was scrutinised by Parliament, the Joint Committee on Human Rights warned of the severity of the restriction, in particular the “chilling effect” that it would have. The Government of course took seriously the concerns raised, but felt the sanction was proportionate given the policy objectives of the register. This shows the seriousness of the sanction and the need for the Government to get the balance right with the approach to enforcement so as not to deter legitimate investment in the UK.

Once the Economic Crime and Corporate Transparency Bill receives Royal Assent, a further enforcement tool will be added to the arsenal: a person who receives a financial penalty from the registrar or is convicted of an offence may be disqualified from acting as a UK director. Once the Bill receives Royal Assent, I will bring forward further regulations under new and amended powers that will further strengthen the requirements of the register.

The statutory instrument deals with two main elements: financial penalties arising from misconduct in relation to the register, and the treatment of land disposed of in Northern Ireland by overseas entities and rights of those acting in good faith.

The Economic Crime (Transparency and Enforcement) Act sets out that the registrar may impose a financial penalty as an alternative to criminal prosecution. The draft regulations set out the procedure for the imposition and enforcement of financial penalties. A financial penalty could be imposed on a variety of persons, depending on the offence—for example, where an overseas entity has failed to register, on a verifier who has knowingly submitted a false filing, or a person who has failed to respond to an information notice sent by an overseas entity.

If the registrar suspects that a person is engaged in conduct amounting to an offence, she may issue a warning notice in writing to that person giving 28 days to make representations about their conduct. If the registrar is satisfied beyond reasonable doubt that the person has engaged in conduct amounting to an offence, she may issue a penalty notice in writing to that person giving 28 days to pay the penalty. If a person fails to pay, interest will accrue at 8%, the statutory interest rate.

The instrument sets out that a financial penalty imposed by the registrar may be a fixed penalty, a daily rate penalty, or a combination of both. Where the criminal fine set out in the Act is a fixed penalty, the registrar may impose more than one penalty in relation to the same conduct if there is continued contravention. That means that a further penalty can be imposed if a person remains non-compliant despite having a penalty imposed. Subsequent penalties could increase to encourage compliance.

The instrument does not prescribe the specific amounts of financial penalties that may be imposed in relation to each offence. Instead, it states that a financial penalty

“must not exceed the maximum fine that could be imposed by a court…under criminal proceedings in the jurisdiction in which the offence was committed.”

That flexibility allows proportionate and effective targeting of non-compliant persons and penalties that can be adjusted according to the seriousness of the misconduct and the specifics of the case.

Given that penalties are an alternative to criminal prosecution, the registrar should bear in mind the process a court would follow. The goal of the financial penalty regime is to encourage ongoing compliance with the requirements. When deciding whether to prosecute and what sentence to give, courts follow sentencing guidelines to ensure that it is in the public interest to prosecute and that the sentence is proportionate to the seriousness of the offence. The registrar should also consider the public interest and be proportionate when imposing financial penalties.

For the failure to register offence, the Act sets out that the criminal fine that courts in England, Wales and Scotland can impose can be unlimited. That means that, in theory, the registrar may impose an unlimited financial penalty when an overseas entity has failed to register.

As an indication of the seriousness of the failure to register offence, the registrar will review the portfolio owned by an overseas entity that has failed to register. The registrar will use a range of sources to estimate the value of the portfolio owned, including the UK house price index and data on business rate bands. The registrar will apply different starting points for the financial penalty depending on whether the estimated value of each property or piece of land falls into one of three bands. If the value of the property or land is estimated to be in the lower band, the starting point for the penalty will be £10,000. If the value is estimated to be in the middle band, the starting point will be £20,000. In the higher band, the starting point will be £50,000.

[Hilary Benn (Leeds Central) (Lab)]

If an entity has broken the law and has been fined, does the UK have any powers to say that that entity cannot in future buy any properties in the UK, even if they then choose to declare the beneficial owner in that case? Is that fine followed up by any further sanction?

[Kevin Hollinrake]

If they have not registered properly, they cannot buy UK property.

If an overseas entity owns more than one property or piece of land, the penalty values will be added up to provide a starting point. Given that interest will accrue at the statutory interest rate of 8%, the penalty will rack up quickly if an overseas entity fails to pay. The registrar may also consider other aggravating factors, such as whether the person has committed the offence previously. When any financial penalty remains unpaid, it can be enforced as if it were a judgment debt, including by a charge being registered against property or land owned by an overseas entity.

The registrar will keep the model under review ahead of imposing financial penalties for failure to file the annual update on time. If the registrar finds that the level of penalties needs to be reviewed because they are insufficient to provide a deterrent, the instrument gives her the flexibility to do so. The instrument also gives the registrar the power to vary or revoke a financial penalty on a case-by-case basis—for example, if new information comes to light that may aggravate or mitigate the misconduct. The instrument also sets out the grounds for appeal and the court’s powers in relation to an appeal.

Companies House has been preparing to operationalise the regulations and will be ready to issue notices as soon as the regulations come into force. Companies House already includes in its annual report the details of financial penalties imposed in relation to UK companies, and the Insolvency Service publishes enforcement outcomes annually. The Government consider that those are appropriate places for these details to be published in relation to the register.

The second part of the instrument sets out the grounds for registering dispositions in Northern Ireland that would otherwise be prohibited. Schedule 8A to the Land Registration Act (Northern Ireland) 1970 is amended to provide a mechanism to allow the Secretary of State to consent to the registration of a land transaction that would otherwise be prohibited.

If a third party transacts with an overseas entity at a time when the overseas entity is non-compliant with the requirements of the register, the third party will be prohibited from registering the transaction; for instance, if it has bought land from an overseas entity that is non-compliant, it will be unable to register itself as the new proprietor. The intention of that sanction is to disincentivise anyone from transacting with a non-compliant overseas entity, which I think was the point that the right hon. Member for Leeds Central was making.

However, in certain circumstances, it is possible that a third party may transact in good faith, without knowing that the overseas entity was non-compliant, resulting in its acquisition of a land title that cannot be registered with the Land Registry. The Act is not intended to penalise innocent third parties and so this mechanism is necessary to allow for the effective functioning of land transactions. A similar mechanism is already available in England and Wales, and Scotland.

In conclusion, I emphasise that the measures in the draft regulations are crucial for the effective operation of the register. I hope that the Committee will support the measures and their objectives. I commend the draft regulations to the Committee.

--- Later in debate ---

[Kevin Hollinrake]

It is a pleasure to respond to the important points raised in the debate. The shadow Minister, the hon. Member for Feltham and Heston, asked when the draft regulations come into force. The date they come into force is 21 June. Companies House will be able to impose financial penalties from that date forward. On warning letters, on different occasions Companies House has written to entities that have not registered—to the property of the address they own or to the service address provided to the registry.

The right hon. Member for Birmingham, Hodge Hill asked about the number of overseas entities that are not registered. We estimate that there are 32,000 entities and that 29,000 are now compliant, so it is 3,000. We think that a significant number of those might not have received the communications and might not be deliberately not co-operating. It is important that any enforcement action taken is proportionate. That is what Companies House is there for.

The right hon. Gentleman also made an important point about resources. As he knows, I am totally aligned with him on ensuring that Companies House has the right resources. We are undertaking a body of work with Companies House to determine what resources it needs and how we apply the right registration or incorporation fee—it will be a higher fee than the current £12. There are also annual fees—recurrent fees—for filing, which can also be used to ensure that Companies House has the right level of resources. We think that that is the horse before cart approach; we are seeing what resources it needs for this and its other work to ensure that the register is accurate.

The shadow Minister mentioned the £2,500—the daily fine for the failure to update offence. The other fines for failing to register are much more significant. The bands I set out earlier are based roughly on council tax bands: A to C will be the £10,000 fee, D to F £20,000 and G to H £50,000. That fine would apply to each property in the portfolio. If we imagine a portfolio of three properties in the mid-range, that would be an initial fine of £60,000, which could be doubled subsequently for non-compliance. The fines are not insignificant and we think that they are at the right level to encourage compliance.

The shadow Minister also made a point about the 750 who have provided the details as required by Companies House, in which they basically say that they no longer hold the properties—the properties have been disposed of—and we therefore feel they are compliant. The 28 days is the time to respond; that was the response time required after the request by the registrar.

On the proxy directors, I understand the point made by the right hon. Member for Birmingham, Hodge Hill, but that does not obviate the requirement for the beneficial owner to be named. Whatever proxy directors there might be, the requirement is for the beneficial owner to be named in any circumstance. That is in existing ownership or future ownership. Someone cannot technically hide behind the proxy director without being guilty of a false filing offence.

[Liam Byrne]

I am grateful for the clarification. Will the Minister also clarify whether, if the penalty regime stops people trading with an unregistered overseas entity, they could still trade with a beneficial owner who was standing behind an entity based overseas that had not fulfilled its obligations?

[Kevin Hollinrake]

Either way, if it were an entity established now or in future, it would be in breach of the legislation—it would be breaking the law by doing that, by not declaring who the beneficial owner was, in any circumstance. Whether that is through shareholders or directors, it is about the person with significant control. That person does not even have to have a shareholding to be a beneficial owner or a person with significant control, if they exert influence by other means. The legislation is in the right place, though enforcement is a different matter, of course, and we must ensure that the relevant enforcement agencies have the resources they need.

The final point was on concerns about trusts. The Economic Crime and Corporate Transparency Bill, which is going through the Lords, includes some additional mechanisms to ensure that we get behind trusts so that they are not used as a vehicle for non-compliance or to avoid the rules. His Majesty’s Revenue and Customs has a great deal of information that is not publicly available for good reason—some people have trusts to protect individuals, such as minors.

To conclude, the draft regulations will complement the measures in the Economic Crime (Transparency and Enforcement) Act 2022 to ensure that the register is as effective as possible. I commend them to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023.