6Enforcement
177.The draft Bill would oblige certain entities to register. This chapter looks at the two mechanisms that the draft Bill proposes to enforce this provision: restrictions on registering land transactions, and criminal offences. It considers the practicability of both mechanisms and focuses in particular on possible hurdles presented by the application of the draft Bill to the UK’s different legal jurisdictions.
Overarching considerations
178.In designing this legislation, the Government has faced two important considerations: first, the difficulty of enforcing sanctions against those who are overseas; and second, the need for sanctions to be proportionate.186 Yet these considerations create a tension. Difficulty enforcing other sanctions has led to the inclusion of potentially intrusive enforcement against property, which could be harder to justify.
179.The proposed restriction on property dispositions would be an interference with owners’ property rights. The effect of Article 1 of Protocol 1 (A1P1) to the European Convention on Human Rights is that any interference with property rights must be proportionate to the public interest aim which justifies it. Where possible, courts must interpret statutes compatibly with the ECHR.187
180.Some possible approaches to enforcement might therefore be harder to justify as a proportionate interference with property rights. For example, Global Witness argued that authorities should have the power, after a period of non-compliance, to “seize” and sell the property, and to distribute the net proceeds among various recipients (not including the overseas entity).188 Transparency International also suggested a confiscation power.189
Restrictions on registering land transactions
181.The principal method proposed in the draft Bill for enforcing the registration requirements is to restrict overseas entities from registering dispositions. This would thereby restrict entities from acquiring legal title to land or disposing of title, including by letting the land. If a defaulting overseas entity owns land in the UK, there is an obvious opportunity for enforcement. As Mr Keatinge of RUSI observed: “You cannot put [land] in your pocket and run away with it.”190
182.The enforcement provisions of the draft Bill highlight three differences in land law between the UK’s legal jurisdictions:
a)on the Scottish register, the lack of any notice that a future transaction might not be registered;
b)differences in the length of leases that will be caught by the restrictions in the draft Bill; and
c)differences in the dates after which registration of an overseas entity’s title to land will trigger the requirement to enter a restriction against that land.
183.In the following paragraphs we consider these in turn, before assessing the potential effect of the enforcement framework on innocent third parties transacting with overseas entities.
Absence of an entry on the Registers of Scotland
184.In England and Wales, non-compliant entities would be prevented from registering a disposition of land by a ‘restriction’, which would appear on the title record for the land at HMLR. A restriction prevents HMLR from registering a disposition unless it is satisfied that its conditions are met. The draft Bill would require HMLR to enter a restriction against land when any overseas entity registered its ownership.191 There would be a similar provision for Northern Ireland, where an ‘inhibition’ is the equivalent of a ‘restriction’.192
185.There is no equivalent of a ‘restriction’ in Scotland. Instead, the Keeper of the Registers of Scotland would be required to reject applications to register a deed where a non-compliant entity was the buyer or seller. The current Keeper, Jennifer Henderson, told us:
“Solicitors in Scotland are used to the idea that they need to go to other places [than the Registers] to check whether anything is inhibiting the property transaction […] If an overseas entity is selling, whether they are appropriately registered or exempt will just be another thing we envisage being checked as part of that process before a purchaser is advised to go ahead. It will be completely clear on the face of the title sheet that an overseas entity is the current owner of the property. We think that will trigger with no issue the solicitor or the searcher following up and checking that the right legal basis for them to transact on the property is in place.”193
186.Mr Sinclair, representing the Law Society of Scotland, said: “There will be ways in which the nature of a proprietor or purchaser as an overseas entity will be flagged other than through the Land Register.”194 Third parties purchasing from overseas entities will have an interest in knowing whether a structure is a registrable overseas entity. It remains unclear to us whether the registrar’s decision on these cases will be publicly available. As the JCHR told us, the legislation is at risk of breaching A1P1 if it is unclear to third parties whether a seller of land is a registrable overseas entity.195
187.We are satisfied that the absence from the Scottish Register of any express limitation where an overseas entity is the owner will not cause conveyancing professionals any difficulty.
188.However, while it is unlikely that many third parties would attempt their own conveyancing without professional help, we see no good reason why those who do should be exposed to a new risk. To cover the potential risk to third parties, the Government may wish to consult further with the Scottish Government about whether Land Register title sheets should signal expressly and in writing that the Keeper regards the applicant as an overseas entity, and that deeds will only be registrable if the entity is compliant.
189.Any such pre-clearance mechanism should be open to all parties to a proposed property transaction involving an overseas entity.
Length of leases which qualify for registration
190.The draft Bill would restrict a non-compliant entity seeking to register the acquisition of a long lease, or a lessee from a non-compliant entity seeking to register the creation or transfer of a long lease. The length of lease affected varies by jurisdiction. It is tied to the length of leases that must be registered to be fully effective.196 In England and Wales, it includes all leases with a term of more than seven years.197 In Scotland, leases over 20 years are registrable.198 In Northern Ireland, the figure is 21 years.199
191.Mr Condliffe told us that there was no reason for these periods to be different, other than the underlying land registration law.200 Mr Freedman, representing the Law Society of England and Wales, pointed out that parties obtaining a lease from an overseas entity of, for instance, 10 years, might not seek legal advice, and might be at greater risk of finding themselves with an unregistrable lease—and therefore no legal title.201 Lessees of longer, more valuable, leases are more likely to take legal advice. There is thus less risk that tenants will be without legal advice in Scotland and Northern Ireland, where the minimum term for registrable leases is longer.
192.Although the Government justifies the length of leases caught by the Bill by reference to those leases which are registrable under the law in each jurisdiction, there would not be perfect alignment: in Northern Ireland some registrable leases would be excluded. 202
193.The variation between the length of leases caught by the Bill in the UK’s three legal jurisdictions means that prospective tenants in England and Wales are more likely than those elsewhere to be without legal advice about a lease affected by the draft Bill. The Government should mitigate this possibility by publicising the requirements of the Register as widely as possible.
Registration dates after which land may be subject to restriction
194.In Northern Ireland, the Registrar would need only to enter an inhibition if the overseas entity registered ownership after the draft Bill had come into force.203 In Scotland, application to register a deed granted by a non-compliant overseas entity would be rejected if the entity’s interest in the land was first registered on or after 8 December 2014.204 In England and Wales, only interests first registered on or after 1 January 1999 will be restricted.205 The dates chosen were those on which the registers started to collect information about overseas entities for every registration. The Land Registers of Northern Ireland do not yet require that this information be provided.206
195.The result of these various cut-off dates is that property held by some identifiable overseas entities would fall outside the scope of the draft Bill. In Northern Ireland, overseas entities could buy property until the commencement of the Bill without having to register at Companies House.
196.Chris Pope OBE, Chief Operations Officer at HMLR, told us that while HMLR does have information that could help to identify overseas entities which registered before 1999, it was not confident that it had a “sufficient view of entities that were registered as owners prior to […] 1 January 1999”.207 The Keeper of the Registers of Scotland, Ms Henderson, had similar reservations about the completeness of data in respect of registrations before December 2014.208 Jonathan McCoy, Deputy Registrar at the Land Registers of Northern Ireland, said that his organisation was in a comparable position in relation to all current registrations.209 Mr Pope did not think that it would be problematic to extend the scope of the draft Bill to registrations before 1999, but believed that HMLR would not be able to guarantee that all entities would be identified.210
197.Clause 30 of the draft Bill would give the Secretary of State power to issue a notice requiring an overseas entity to register at Companies House. A notice would be given to an entity registered as the owner of land (or a tenant on a sufficiently long lease) but only if they registered after the dates referred to above.211 Failure to comply with the notice would be a criminal offence but the power would run “in parallel” with the amendments to land registration, and would not itself lead to any restriction on dealing with property.212
198.According to the provisions of the draft Bill, only those entities which, under existing rules, were obliged to supply the land registries with information identifying them as overseas entities would need to register at Companies House. But there is no obvious reason why the Secretary of State’s power under Clause 30 to order registration should be limited to these overseas entities. The registrars, or the Secretary of State, may be able to call on enough information to identify overseas entities which registered property even before collection of an owner’s country of incorporation became mandatory in the various legal jurisdictions.
199.We therefore recommend that the Secretary of State be given power to require any overseas entity to register at Companies House if registered as proprietor or owner of a qualifying estate (or its equivalent in Scotland). This might be achieved by amending Clause 30 to remove the incorporation of the retrospective time limits in Clause 9(9)(a)(ii), (b)(ii) and (c)(ii).
200.To ensure that this approach will be fully enforced, we recommend that Schedules 3 to 5 be amended so that the recipient of such a notice is restricted from disposing of land. To avoid the difficulty that this might otherwise cause for third parties in Scotland (where no restriction or inhibition would be registered), the Secretary of State, or the Keeper of the Registers of Scotland, should be required to publish and maintain a list of those to whom such notice had been given.
Innocent third parties
201.When a third party buys land from an overseas entity, they run the risk of their title being unregistrable if the entity has not registered at Companies House. Similarly, a third-party vendor would wish to ensure that a purchaser registered title to their newly purchased land, and a tenant of a long lease could also be affected by non-compliance on the part of their landlord.213
202.As Mr Sinclair of the Law Society of Scotland pointed out, registration of deeds in Scotland can take a long time (“in excess of nine months”). If an application to register a deed were rejected and had to restart, and the overseas entity meanwhile breached its updating duty under the draft Bill, the purchaser would be unable to register.214 In England and Wales, as the Government recognises, an overseas entity might not yet have registered its property at HMLR, but under existing legislation would still have the power to take a number of other courses of action.215 These include making any other disposition (such as leasing or assigning the property).216 Despite the Government’s statement in their overview document,217 a very similar concept exists in Northern Ireland.218
203.If the overseas entity sold property when not compliant with the draft Bill’s registration requirements, the sale would never be registrable.219 The purchaser would receive only what is known as an equitable interest: a class of ownership which can be lost in some circumstances. Yet there would be no indication on the land registry to alert the purchaser to the prohibition. Mr Freedman, of the Law Society of England and Wales, pointed out that this failure to receive good title could not be rectified at a later date.220 The draft Bill provides that an overseas entity must either be registered or exempt “at the time of the disposition” or, in Scotland, “as at date of delivery of the deed”.221
204.The Government has recognised that there could be injustice to innocent third parties, and asked in its July 2018 draft Bill consultation paper whether there should be a power to disapply or appeal the effect of the prohibitions placed on property.222 The Government told us that respondents “overwhelmingly believed” that there should be such a power, and that it was considering whether to include one, with “stringent guidelines as to when it would apply”.223 But no such power was included in the draft Bill. The JCHR recommends the inclusion of such a power, to ensure compliance with the ECHR.224
205.The Government is aware of many of the adverse consequences that the draft Bill could bring to third parties. Any enforceable mechanism prohibiting the disposal of property will create risks for innocent third parties. We therefore welcome the consideration that is being given to a possible power to disapply the effects of restrictions on registration.
Accuracy of information: sanctions and innocent third parties
206.The Law Society of Scotland raised a further issue affecting third parties: whether the validity of an entity’s registration at Companies House would depend upon it simply filing a return at Companies House, or whether it would depend on the accuracy of that return.225
207.The Government justifies an annual, rather than “event-driven”, update requirement on the basis that certainty is needed by third parties dealing with overseas entities.226 The logic of the Government’s position is that even an inaccurate update will provide protection for a third party.
208.But the Government also told us that the duty in Clause 7 was to provide “correct information”.227 Under Schedules 3 to 5, the land registrars are bound to refuse registrations where the overseas entity is not registered.228 For these purposes an entity is not a registered overseas entity if it fails to comply with the duty in Clause 7 that the information should be accurate.229 Thus a third party—and the land registrars—might need to satisfy themselves not only that an update had been delivered, but that it was accurate.230
209.The JCHR’s view is that the restriction may be disproportionate if it is not clear to third parties whether an overseas entity is “adequately registered at the time of sale”.231 Its letter to our Committee suggests that it is not clear how a third party will know whether the Companies House register is up-to-date. Enabling third parties to know with ease whether an overseas entity was compliant would also help to avoid this potential “‘chilling effect’ on the ability of overseas entities to deal effectively with their property, because of wariness of potential buyers”.232 In addition it would reduce the risk of the legislation breaching Article 14 of the European Convention on Human Rights, which requires that the rights in the ECHR must be secured without unlawful discrimination.
210.An inaccurate update under Clause 7 would, and should, attract criminal penalties. However, it seems inconceivable that the Government intends that an inaccurate update under Clause 7 should affect the registration by third parties of dispositions to them: such inaccuracy might be impossible for third parties to discover. But, as drafted, Schedules 3 to 5 could indeed have such consequences.
211.We therefore recommend that the Government should clarify, on the face of the Bill, the extent to which the land registries and applicants for registration should be concerned with the accuracy of updates under Clause 7. To avoid a “chilling effect” on the property market, the accuracy of such updates should not be a matter of concern for innocent third parties entering into property transactions with overseas entities.
212.Provided that the provisions of the draft Bill work as intended, and that the Government takes our recommendations into account, we are satisfied that the overall effect of the draft legislation on the UK property market will be beneficial for those involved in land transactions.
213.The Government should continue to consult with the public as it implements the legislation, and communicate clearly to individuals and entities about how they might be affected.
Criminal offences
214.Under the draft Bill an entity would commit a criminal offence if it:
a)made a disposition that could not be registered;
b)(for UK land outside Northern Ireland) failed to register as an overseas entity within 18 months of commencement if it owned land that it registered before commencement; or
c)failed to comply with the updating duty in Clause 7.
215.It would also be an offence for a person to fail to comply with a notice sent by an entity to acquire information from or about beneficial owners under Clauses 11 and 12, or to provide false or misleading information to Companies House. The Insolvency Service will be responsible for bringing any prosecutions.233
Use of criminal sanctions
216.Some witnesses criticised the use of criminal sanctions. The Institute of Chartered Accountants in England and Wales told us that criminal sanctions for administrative breaches would “serve only to penalise predominantly legitimate investors”.234 The British Property Federation stated that it was “highly likely” that existing owners would “fail to comply through genuine ignorance as opposed to any malicious intent”.235
217.The Law Society of Scotland was particularly concerned about the proportionality of using criminal sanctions to penalise any failure to provide annual updates: “It appears to be inappropriate for failure to provide an update to automatically trigger the same sanctions as providing false information.”236 However, the sanction in Clause 8 for failing to update (a daily fine not exceeding £500) differs from that in Clause 28 for making a false statement (imprisonment of up to two years or a fine, or both). It is reasonably clear that Clause 28 is intended to apply even if a false statement might also amount to a breach of the updating duty.237
218.On the other hand, Transparency International and Global Witness considered the level of fines insufficient, arguing that a fine accumulating at £500 per day was likely to be less than the appreciation in value of a £5 million property.238 They also noted that similar fines for Scottish limited partnerships which do not file beneficial ownership information were often not imposed. Mr Cobham of the Tax Justice Network suggested that enacting penalties which were not enforced could weaken respect for the rule of law.239
Enforceability
219.The Law Society of Scotland referred to the difficulty of enforcing criminal offences against people or entities overseas. Criminal sanctions can be enforced overseas, if at all, only when the sanction is in respect of conduct that is an offence both in the UK and in the foreign jurisdiction.240 Enforcement agencies told us that there was “certainly a difficulty” in enforcing criminal sanctions against overseas entities, though such sanctions could have a deterrent effect.241 The Law Society of Scotland suggested that a civil penalty “might be more effective [than criminal sanctions] as it would potentially be easier to ensure enforcement in practical terms, for example a judgment in a UK court […] could be enforced against other assets held in the UK”.242
220.However, the enforcement agencies agreed that land presented “an opportunity” for enforcement.243 As noted above, land is an asset that cannot be removed from a jurisdiction.244 In England and Wales, a charging order can be obtained to enforce a fine against an offender’s land.245 The Minister told us that a similar sanction in Scotland and Northern Ireland had not been explored or discussed with the devolved administrations.246 The agreement of the devolved administrations would be required to enact this change.
221.We recognise that there will inevitably be hurdles to enforcement, and that the aim of this legislation is to create a hostile environment in the UK for money laundering. But Parliament should not enact unenforceable legislation, and legislation without “teeth”’ will be no deterrent.
222.We are attracted to the idea of civil penalties, particularly if they are easier than criminal sanctions to enforce abroad, and against land or other assets in the UK. Civil penalties could be backed up by criminal sanction for non-payment.
223.We therefore recommend that the Government should introduce civil penalties and explore with the devolved administrations the possibility of enforcement against land of any criminal fines imposed under the Bill.
191 Land Registration Act 2002, Schedule 4A, paragraph 3 (Draft Registration of Overseas Entities Bill, Schedule 3, paragraph 3). Restrictions must also be entered against land already registered by an overseas entity, where registered from 1999. See paragraph 194.
192 Land Registration Act (Northern Ireland) 1970, Schedule 8A, paragraph 3 (Draft Registration of Overseas Entities Bill, Schedule 5, paragraph 3)
196 Written evidence from the Department for Business, Energy and Industrial Strategy (ROE0011), para 31. In England and Wales, a registrable lease (and the transfer of such a lease) does not operate in law until registered (it may operate in equity): Land Registration Act 2002, section 27(1). In Scotland, no ‘real’ (proprietary) right can be obtained other than by registration: Land Registration etc (Scotland) Act 2012, section 50(3).
197 Land Registration Act 2002, section 27(2)(b)(i)
198 Registration of Leases (Scotland) Act 1857, section 1(1)
199 Land Registration Act (Northern Ireland) 1970, section 24 and Schedule 2. When a lease is assigned (transferred), it is the term remaining that is counted.
202 Written evidence from the Department for Business, Energy and Industrial Strategy (ROE0011), para 31
203 Land Registration Act (Northern Ireland) 1970, Schedule 8A, paragraph 3(1)(b) (Draft Registration of Overseas Entities Bill, Schedule 5, paragraph 3)
204 Land Registration etc (Scotland) Act 2012, Schedule 1A, paragraph 1 (Draft Registration of Overseas Entities Bill, Schedule 4, paragraph 7). In addition, an overseas entity which so registered as owner or long-lease tenant must register at Companies House within 18 months of commencement: Schedule 1A, paragraph 8 of the 2012 Act.
205 Land Registration Act 2002, Schedule 4A, paragraph 3(1)(b) (Draft Registration of Overseas Entities Bill Schedule 3, para 3). Similarly to Scotland, an overseas entity that so registered as proprietor (freehold or of a long lease) must also register at Companies House within 18 months of commencement( Draft Registration of Overseas Entities Bill, Schedule 3, para 4)
206 Registers of Scotland began to record whether a registered proprietor was an overseas entity on 8 December 2014: Explanatory Notes to the Draft Registration of Overseas Entities Bill, para 13; Q 19 (Jennifer Henderson). HMLR started routinely entering a company’s country of incorporation into the register in January 1999, when it required that data to be provided as part of registration: Q 19 (Chris Pope); see also Her Majesty’s Land Registry and Law Society of England & Wales, Property and title fraud, (September 2017), p 16: https://www.lawsociety.org.uk/support-services/advice/articles/property-and-title-fraud-advice-note [accessed 12 April 2019] ; Her Majesty’s Land Registry, Overseas Companies Ownership Data: technical specification (November 2017): https://www.gov.uk/government/publications/overseas-companies-ownership-data-technical-specification/overseas-companies-ownership-data-technical-specification [accessed 3 April 2019].
211 1 January 1999 in England and Wales, 8 December 2014 in Scotland and commencement of the Act in Northern Ireland. See Draft Registration of Overseas Entities Bill, Clause 9(9)
215 Department for Business, Energy & Industrial Strategy Overview Document: Draft Registration of Overseas Entities Bill, para 33: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727901/2._FINAL_Overview_document__1___1_.pdf [accessed 1 April 2019]
216 Land Registration Act 2002, sections 23, 24
217 Department for Business, Energy & Industrial Strategy, Overview Document: Draft Registration of Overseas Entities Bill, para 33: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727901/2._FINAL_Overview_document__1___1_.pdf [accessed 1 April 2019]
218 Land Registration Act (Northern Ireland) 1970, section 33; Land Registration Rules (Northern Ireland) 1994 (SR 1994 No 424), regulation 39
219 Land Registration Act 2002, Schedule 4A, paragraph 4 (Draft Registration of Overseas Entities Bill, Schedule 3, paragraph 3). See also Department for Business, Energy & Industrial Strategy Overview Document: Draft Registration of Overseas Entities Bill, para 33: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727901/2._FINAL_Overview_document__1___1_.pdf [accessed 1 April 2019].
221 Land Registration Act 2002, Schedule 4A, paras 3(2)(a) and 4(2)(a) (Draft Registration of Overseas Entities Bill, Schedule 3, para 3), and Land Registration (Scotland) Act 2012, Schedule 1A, para 2(1)(c) (Draft Registration of Overseas Entities Bill, Sched 4, para 7). Provision similar to that for England and Wales is made for Northern Ireland: see Land Registration Act (Northern Ireland) 1970, Schedule 8A, paras 3(5)(a) and 4(3)(b) (Draft Registration of Overseas Entities Bill, Schedule 5, para 3).
222 Department for Business, Energy & Industrial Strategy Overview Document: Draft Registration of Overseas Entities Bill, July 2018, question 6.1: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727901/2._FINAL_Overview_document__1___1_.pdf [accessed 1 April 2019]. See also Written evidence from Department for Business, Energy and Industrial Strategy (ROE0011), para 33.
223 Written evidence from the Department for Business, Energy and Industrial Strategy (ROE0011), para 33.
227 See Appendix 6, issue 13.
228 See, for example, Land Registration Act 2002, Schedule 4A, paragraphs 2(a) and 4(2)(a) (Draft Registration of Overseas Entities Bill, Schedule 3, paragraph 3) and Land Registration etc (Scotland) Act 2012, Schedule 1A, paragraph 1(2)(a) and 2(1)(c) (Draft Registration of Overseas Entities Bill, Schedule 4, paragraph 7).
229 See, for example, Land Registration Act 2002, Schedule 4A, paragraph 7 (Draft Registration of Overseas Entities Bill, Schedule 3, paragraph 3) and Land Registration etc (Scotland) Act 2012, Schedule 1A, paragraph 7(2) and (3) (Draft Registration of Overseas Entities Bill, Schedule 4, paragraph 7)
233 Written evidence from Department for Business, Energy and Industrial Strategy (ROE0011), para 29
234 Written evidence from Institute of Chartered Accountants in England and Wales (ROE0005), para 13
235 British Property Federation, Draft Registration of Overseas Entities Bill (September 2018): https://www.bpf.org.uk/sites/default/files/resources/BPF%20response%20Draft%20Registration%20of%20Overseas%20Entities%20Bill%2009.18.pdf [accessed 18 April 2019]
237 We deal with the argument that a false statement might amount to a breach of the updating duty in paragraphs 208 to 211.
240 The principle is known in international law as “double criminality”. The EU’s Framework Decision 2005/214/JHA of 24 February 2005 provides for enforcement of financial penalties in Member States which have implemented the Framework Decision. In those Member States (currently 24, including the UK) a fine can be enforced without the need to show “double criminality” for specified offences. These offences include money laundering and “offences established by the issuing State and serving the purpose of implementing obligations arising from instruments adopted under the EC Treaty or under Title VI of the EU Treaty” (Article 5(1)).
244 See paragraph 219.
245 Powers of Criminal Courts (Sentencing) Act 2000, section 140; Magistrates’ Courts Act 1980, section 87(1)