36.This chapter considers the definition of “overseas entities” that the draft Bill seeks to introduce. It looks at structures which will be exempted by the draft Bill—such as entities owned by foreign governments—as well as those that the draft Bill does not cover, such as trusts. It asks whether these exemptions and omissions will amount to loopholes that money launderers might seek to exploit, and analyses how well the Government’s proposals to close such loopholes might work.
37.Clause 2 of the draft Bill sets out its definition of “overseas entity”:
(1) In this Act “overseas entity” means a legal entity that is governed by the law of a country or territory outside the United Kingdom.
(2) In this Act “legal entity” means a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed.
38.The Explanatory Notes state that the draft legislation is designed to apply to entities formed or incorporated overseas, which transact with land in the UK. These notes also elaborate upon the definition of “legal entity”:
“[A ‘legal entity’] includes a body corporate (e.g. a company) or a partnership or other type of entity. What is key is that whatever the type of corporate vehicle, it must have legal personality under the law by which it is governed. This could therefore include companies, partnerships, corporations sole, governments and public authorities.”
39.Entities which do not fit the description set out in the Bill will not be bound by its requirements. The definition of overseas entities must therefore be clear and authoritative, and sufficiently wide and flexible to encompass the broad range of overseas entities which own UK property.
40.If the draft Bill is effectively to increase the transparency of overseas landholding in the UK and avoid loopholes, the Government will need to enforce consistency in ensuring that overseas entities register. Since failure to register will be an offence under the proposed Act, it will be important for the entities themselves, third parties wishing to transact with overseas entities, legal professionals and enforcement agencies that the Bill’s definition of “registrable overseas entity” is as clear as possible.
41.The Law Society of Northern Ireland told us that that Bill’s definition of “legal entity” was “arguably unclear” about whether it includes individuals. An individual can be a “legal person”, but the Bill refers only to “a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed”.
42.It is unlikely that the definition of “legal entity” would be interpreted as including individuals. But we have heard concern that the draft Bill’s unqualified reference to a “legal person” in Clause 2 may add unnecessary difficulty to those questioning whether they come under the scope of the Bill.
43.The description of the term “legal entity” in Clause 2 of the draft Bill and its Explanatory Notes should therefore put the definition of such a pivotal term beyond any possible doubt.
44.When determining whether an entity should register its beneficial ownership information, it will be necessary to ascertain whether that entity is indeed an “overseas entity” for the purposes of the Bill. Given that such entities are, by definition, based abroad, the draft Bill’s definition will be likely to apply to a wider range of legal entities than UK-based practitioners will be familiar with. The definition in Clause 2 of an overseas entity as “a legal person under the law by which it is governed” means that practitioners dealing with foreign structures owning UK property will need to refer to foreign law or lawyers to determine whether an entity has “legal personality” in another jurisdiction, and is therefore registrable under the Bill.
45.John Sinclair from the Law Society of Scotland pointed to the discrepancy between Scottish limited partnerships, which have juridical personality, and their equivalents in England and Wales, which do not: “It is easy to anticipate that equivalent situations will arise in foreign jurisdictions where it will not be clear whether or not an entity is a legal entity.”
46.Philip Freedman CBE QC (Hon) of the Law Society of England and Wales highlighted the cost implications of determining whether entities based abroad would come under the scope of the Bill:
“A legal opinion from lawyers in the jurisdiction in which the entity exists […] adds to the costs of the transaction, but many overseas buyers are aware that they may have to produce these and bear the cost.”
47.However, Jacquie Griffiths, BEIS policy lead on the draft Bill, downplayed the potential hurdles for overseas entities: “The vast majority of those who undertake land transactions in the UK, particularly high-value or complex ones, will already be using a UK regulated professional.”
48.Schedule 3 requires Her Majesty’s Land Registry (HMLR) to prohibit the registration of an overseas entity as the proprietor of land unless the entity is either registered or exempt. If an entity were to attempt to register its ownership of land at HMLR or one of the other UK land registries, the Registrar (or, in Scotland, Keeper) would check the proposed Register of Overseas Entities to establish whether the entity was a registered overseas entity. If not registered, restrictions on the disposition of title would apply, and the registry would refuse to register the entity as proprietor. The onus would then be on the entity to prove that it was not a registrable overseas entity. Ms Griffiths described the process: “If they then apply to register title at any of the three land registries and believe that they are not a legal entity, they must provide evidence that will satisfy the relevant land registry.”
49.If an entity wished to argue either at Companies House or at a land registry that it was not a registrable legal entity, the responsibility to provide evidence would lie with the entity. The Law Society of Scotland noted the “potential for a dispute to arise if an entity considers it does not meet the requirements for registration and Companies House takes a different view (or even vice versa)”.
50.Mr Freedman suggested that, to solve any such dispute:
“There needs to be some sort of adjudicator […] it needs to be a dispute procedure the outcome of which, for the purposes of the legislation, is binding on the Land Registry and on Companies House. Some adjudicator who makes a ruling that binds the Land Registry and Companies House seems to be what is needed.”
51.The Minister, Ms Tolhurst argued that such an adjudicator was unnecessary: “The individuals concerned will know that they are a legal entity in the country in which they are based […] the onus is on the entity. It needs to assure us that it is legal.” When making an application for registration, an overseas entity will need to provide, among other information, the country of incorporation or formation, the legal form of the entity, and the law by which it is governed. If it has information about which country’s law governs the entity, Companies House should be able to establish whether the entity is a registrable overseas entity.
52.This position assumes, however, that an entity knows that it is registrable and therefore makes an application to Companies House. Ms Griffiths told us: “If an entity truly believed that it was not a legal entity in scope of the Bill, Companies House would never hear about it. That is because they would not go to register.” As we saw above, if a legal entity failed to register at Companies House, a land registry could reject its application to register land. The Registrar would then decide whether the entity was an overseas entity for the purposes of the Act, and therefore obliged to register.
53.It is possible that some new forms of entities may be developed that would not be classed as registrable. The Minister stated: “We […] cannot possibly dictate all those potential entities.” The Government’s delegated powers memorandum, published alongside the Bill, also acknowledged that some entities ought not to be captured by the Bill—there may be “new types of entities introduced in other countries which should not be in scope of the overseas entities regime”. However, the draft Bill does not provide for any pre-clearance mechanism or procedure to resolve these discrepancies.
54.The land registries are not equipped to make final decisions on the legal personality of an entity. It is inappropriate to delegate this task to them, not least because such a decision could, under the draft Bill, lead to criminal prosecution if the entity had not registered correctly.
55.We consider that such a requirement would put significant burdens on the land registries. There may be new forms of structures which emerge in other jurisdictions whose status as legal persons the registries, the entities themselves, and lawyers will find difficult to determine.
56.Decisions of such consequence are much better suited to Companies House. Furthermore, the Government should publish guidance on how the definition of overseas entities should be interpreted.
57.We agree that the Government should make efforts to avoid registering individuals out of scope of the Bill. We therefore recommend a pre-clearance mechanism, including some formal means of adjudication, which confirms in advance of transactions whether legal entities are registrable. Disputes about categorisation will be inevitable, and the Government will need to consider necessary mechanisms to account for entities which disagree with decisions under the Act.
58.There is some evidence of a need for a “fast-track” registration service, because some property holding companies or special purpose vehicles (SPVs) are commonly incorporated only days in advance of a transaction. We heard evidence that delays in registration could have an adverse effect on the property market. John Condliffe of the Investment Property Forum told us: “If Companies House has to produce a registration number, it will need to be able to do that very quickly in order not to hold up transactions that involve overseas entities acquiring legal title.”
59.We are persuaded of the need for entities to be able to register their beneficial ownership information as quickly as possible, particularly in the case of special purpose vehicles and property holding companies which are sometimes incorporated only a few days before a transaction. We urge the Government to provide Companies House with sufficient resources to meet this challenge.
60.Under the draft Bill, an overseas entity is registrable unless it is exempt. The effect of an exemption would be that an entity would not be required to register its beneficial ownership information with Companies House. When attempting to register ownership of land, or challenge the entry against its land of a restriction or inhibition, an exempt overseas entity could provide evidence to a land registry of this exemption and the resultant freedom from restrictions on acquisition and dispositions.
61.No immediate exemptions are laid out on the face of the Bill. There is instead a delegated power in Clause 30(6) which allows the Secretary of State to determine categories of entities, or individual entities, that are exempt from the requirement to register.
62.The Government’s proposal is that the secondary legislation would be laid under the negative resolution procedure, whereby a statutory instrument becomes law on the day that it is signed by a Minister, and automatically remains law unless a motion to reject it is agreed by either House within 40 sitting days. This procedure involves less parliamentary scrutiny than the affirmative procedure, which requires both Houses to agree to secondary legislation.
63.The Bill’s Explanatory Notes explain that there may be certain cases where entities currently within scope of the Bill could be exempt from registration requirements. For instance, the Government may not wish to require a foreign government to register: “The Government may use this power to exempt governments and public authorities where they would otherwise meet the definition of overseas entity.”
64.Some of our witnesses challenged the idea of exempting governments. Duncan Hames, Director of Policy at Transparency International, accepted that in the case of foreign governments, “the means of sanction might not be as open to us as otherwise.” He nevertheless suggested that they should not be exempted:
“Foreign Governments are a particularly interesting case, because a Government will be very conscious of their inability to follow through with sanctions and their requirements. Nonetheless, we would argue that the reporting requirement should be no less stringent, not least because property that is owned by another country’s Government will in a number of cases be at particular risk of the kind of corrupt acts I described. We often see state-owned companies and enterprises as part of the arrangements whereby public assets leak into private hands.”
65.Ava Lee, Senior Anti-Corruption Campaigner at Global Witness argued: “It would be much more useful if [a foreign government] was literally named as the state [on the Register] so that you could see the breadth of what states own.” Mr Hames thought that information about foreign governments’ beneficial ownership could be published after an asset had passed into private hands:
“Even if there is an acceptance that you cannot pursue this information while it is the property of a foreign government, it is very important that at the moment it ceases to be the property of a foreign government that event triggers the release of information that would be entirely relevant.”
66.Clause 30(6) is designed to future-proof the Bill against new types of entities which may arise, but which should not be in scope. The Minister told us: “Things can change quickly, so we want to be in a position where we can act relatively speedily.”
67.Regulations made under Clause 30(6) would exempt entities described in secondary legislation not only from the requirement to publicise beneficial ownership information, but also from providing that information to Companies House. The Government should consider the merits of a new clause to protect information registered by certain types of entities—such as foreign governments—from public disclosure, while still requiring the provision of that information.
68.We understand that new overseas entities may appear, and that the powers outlined by the Bill will need to be flexible enough to accommodate such developments. Yet Clause 30(6) allows the Secretary of State much discretion, and the types of overseas entities which might be exempted under this power are fundamental to the scope of the Bill.
69.Our clear preference would be for categories of those types of entities which may be eligible for exemptions under Clause 30(6) to be on the face of the Bill.
70.Although we do not believe that it is the Government’s intention to exempt, wholesale, entities from certain countries, the potential effects of Clause 30(6) call for adequate Parliamentary scrutiny. We therefore recommend the use of the affirmative resolution procedure for this significant power.
71.Clause 15 enables the Secretary of State to modify requirements for overseas entities where the Government decides that the entity is already providing beneficial ownership information to a register in its country of formation, and where the Government considers that register to be “equivalent” to the Register of Overseas Entities.
72.Our understanding is that this Clause aims to avoid double-reporting for entities which already provide beneficial ownership information to registers in other countries. The Register held by Companies House would contain information about where this information was held. As of April 2019, 836 companies were exempt from the requirement to file information to the PSC register because they were subject to “other disclosure requirements”.
73.The draft Bill does not contain any definition of ‘equivalence’. We are inclined to accept the definition proposed by OpenCorporates (a database that shares information on corporate entities), which stated that “equivalent” registers:
74.The Government proposes that powers under Clause 15 to modify application requirements should be exercised only when registers are truly “equivalent” to the Register proposed by the draft Bill.
75.We are concerned that the meaning of “equivalent” under Clause 15 should be closely defined. For true equivalence, we believe that overseas registers should be publicly accessible. Companies House should ensure that it signposts these registers so that users can find them without difficulty, providing a link to, or contact details for, the relevant register.
76.The draft Bill does not require trusts to register. Unless a trust is a “legal person” under its national law, it cannot be described as an entity, as defined in Clause 2 or otherwise. Indeed, many of the draft Bill’s provisions would be inapposite for trusts. For example, the draft Bill defines beneficial ownership in terms of shareholdings, voting rights, power to appoint to boards, and “control”. Only the last is relevant to trusts.
77.A trust is a relationship in which the trustee holds property for the benefit of the beneficiary (trusts may have multiple trustees and beneficiaries). The trustee is the legal owner of the property, but the beneficiary is the ‘true’ or beneficial owner. Some trusts are ‘discretionary’: their terms allow the trustee to pay beneficiaries as the trustee chooses. Trusts are used for a variety of legitimate purposes, including by charities, whose property is usually held by trustees.
78.Witnesses explained, however, that trusts could be used to bypass the draft Bill’s registration requirements. Prof Fisher QC suggested that anyone wishing to conceal their ownership of a property might place the overseas entity’s shares in a discretionary trust. Ms Lee of Global Witness gave very detailed examples of cases in which trusts had been used to mask true ownership. Mark Thompson, Chief Operating Officer of the SFO, suggested that fraudsters believed that “an offshore trust” was “a good starting point”, describing it as part of “the fraudster’s handbook”. Mr Thompson had:
“seen the same structure a number of times. There is typically a discretionary trust at the top, incorporated outside the UK, and then any number of intermediate holding companies […], three, four or five, which could be multiple jurisdiction.”
79.Under Schedule 2, paragraph 6, ‘Condition 4’ of the draft Bill, beneficial owners who set up a discretionary trust for avoidance purposes will have to register if they exercise “significant influence or control over the trustees”. But other trust beneficiaries are not expressly required to register, and the draft Bill would not apply if the immediate owners of land were individuals.
80.Some trusts are already obliged to register under the HMRC Trust Registration Service (TRS), which is the Government’s proposed vehicle for implementing the EU’s Fifth Anti-Money Laundering Directive. The Minister, Ms Tolhurst, wrote that requiring trusts to register under the draft Bill as well as the TRS would “divide” the UK’s framework for trust registration between two mechanisms, and so “place additional administrative burdens on both trustees and Government”.
81.The TRS requires “trusts with a UK tax consequence” to give HMRC information about their beneficial owners. The relevant taxes include capital gains tax and stamp duty land tax. The Government told us that offshore trusts purchasing land in the UK would normally generate a UK tax consequence. Jersey Finance Limited explained how the effect of these stipulations was that beneficial owners must be registered with the TRS when land held on trust is bought or sold.
82.In 2018, the EU adopted the Fifth Anti-Money Laundering Directive (5AMLD). The Directive amends the EU’s earlier Fourth Anti-Money Laundering Directive to widen access to beneficial ownership registers and amend the type of trusts which must register information. The Directive is to be transposed into national law by January 2020, and its registers set up by March 2020. The Government intends to widen the scope of the TRS in order to transpose 5AMLD into UK law. The Minister said that the Treasury was “looking to consult” on the introduction of that legislation, and assured us that the Government would implement 5AMLD even if the UK leaves the EU without a deal.
83.It remains unclear whether 5AMLD will require that the TRS:
a)reveal those who actually benefit from discretionary trusts (rather than those with a potential benefit); and
b)record beneficiaries of discretionary trusts holding shares in offshore companies owning UK property.
84.Currently, the TRS is not publicly accessible. The Government will implement 5AMLD by widening access to the TRS to those with a “legitimate interest”. Witnesses from transparency groups emphasised the importance of information about the beneficiaries of trusts being made publicly available.
85.Our witnesses expressed mixed support for using the draft Bill as a vehicle for requiring the registration of trust beneficiaries. Omitting trusts, some argued, would leave significant loopholes. Mr Hames of Transparency International told us: “If we leave big loopholes, at the same time as taking strong action in one area, we should not be surprised if they are fully exploited.” The City of London Police felt that if trusts were excluded, “the process will be fairly pointless”. The Solicitors Regulation Authority said that owners might move property into trusts, to hide it from the public, unless the draft Bill included them.
86.Mr Hames suggested that trusts might be included depending on when the Bill was introduced relative to the transposition of 5AMLD into UK law. Global Witness said that the Government should either bring trusts within the draft Bill or commit to publishing the trusts register required by 5AMLD. The SFO considered trusts to be problematic, but did not press for the implementation of 5AMLD within the draft Bill.
87.We heard evidence that trusts might be used to circumvent the obligation to register contained within the draft Bill. This possible loophole is worrying, and, to allay these concerns, the Government should set out in detail in its response to this report how it intends to counteract this possibility.
88.The Government told us that the UK’s implementation of the Fifth Anti-Money Laundering Directive would aim to close such loopholes. It is of critical importance that it does so, and as soon as possible. We are therefore grateful for the Minister’s assurance that 5AMLD would be implemented by expanding the HMRC Trust Registration Service even if the UK leaves the EU without a Withdrawal Agreement.
89.We also welcome the Government’s assurance that the TRS will cover discretionary trusts, and that overseas trusts with assets which include UK land will be required to register. We suggest, however, that the Government consider what information the TRS should require from these trusts in order to establish their true beneficiaries.
90.Because of its importance in preventing the use of trusts in money laundering, we recommend that the TRS be publicly accessible.
91.Given that the Fifth Anti-Money Laundering Directive is to be implemented before this draft Bill, we regret that the Government’s proposals for the former are not yet available. It is difficult to scrutinise part of the proposed anti-money laundering regulatory framework without being able to see the full picture.
92.The Government will need to exercise great care in ensuring that trusts do not slip into any gaps between the two frameworks. We therefore call on the Government to explain which arrangements for holding land in the UK involving trusts will be covered by the draft Bill, and which by implementation of 5AMLD. The draft Bill should set out expressly those situations where it covers arrangements for holding land in the UK that involve trusts. At the very least, we would expect such situations to be covered by statutory guidance.
93.Trusts should not be required to register twice, which, the Government says, would create an unacceptable administrative burden. Accordingly, we invite the Government to give serious consideration to implementing the provisions in this draft Bill at the same time as 5AMLD, and to ensure that charitable institutions are covered by one of the two frameworks.
51 , para 39
52 , para 39
53 , Clause 2(2)
54 , Clause 2
58 Corresponding provision is made for Scotland (Schedule 4, new Schedule 1A, (4)(2) and Northern Ireland, Schedule 5, new Schedule 8A, (3)(3)).
60 Written evidence from the Law Society of Scotland ()
63 , Schedule 1, Part 2, 2 (1)
66 , para 51
68 (Kelly Tolhurst MP)
69 UK Parliament, Negative Procedure: [accessed 12 April 2019]
70 , para 99
76 , para 69
77 Written Answer by Kelly Tokhurst MP to Question by Alison Thewliss MP, 29 April 2019
78 Written evidence from OpenCorporates
79 See paragraphs 96 to 97.
81 Written evidence from Global Witness ();
84 (John Sinclair)
86 Written evidence from the Department for Business, Energy and Industrial Strategy ()
87 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ()
88 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (), Regulations 42(2)(b) and 45(14). The taxes also include land and buildings transaction tax in Scotland and land transaction tax in Wales.
90 Written evidence from Jersey Finance Limited ()
91 Council Directive 2018/843 of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, (19 June 2018)
92 Council Directive 2018/843 of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, (19 June 2018), Recital 53
93 Written evidence from the Department for Business, Energy and Industrial Strategy ()
95 (Alex Cobham)
96 5AMLD refers to trustees acquiring real estate in the name of the trust but is silent on the acquisition of interests in entities which own property. Council Directive 2018/843 of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, (19 June 2018), Article 31(1) and (3a).
100 Written evidence from City of London Police ()
101 Written evidence from the Solicitors Regulation Authority ()
103 Written evidence from Global Witness ()
104 (Mark Thompson)
105 Since the time of writing, the Government has published proposals for the implementation of the Fifth Anti-Money Laundering Directive. This was published after our evidence sessions had concluded.