Draft Registration of Overseas Entities Bill Contents

Appendix 5: List of possible loopholes in the draft Bill

This table illustrates the possible loopholes that we have identified in the draft Bill, which could be exploited by those with malign intent. The list is not intended to be exhaustive.

	List of possible loopholes in the draft Bill
Trusts are not included within the definition of “overseas entities” Chapter 3: Structures required to register	The definition of “overseas entity” contained in Clause 2 does not encompass trusts. They are not, therefore, required to register. Though the Government argues that other current and future measures will require the registration of trusts, such registers will not be public. Furthermore, the land registries will have no ability to restrict transactions by non-registered trusts. Someone wishing to launder money could establish a trust, allowing the trustees to hold property on their behalf. Although the trust would usually be recorded by the Trust Registration Service, this would not be public information. Moreover, although the ultimate owner would be caught by ‘Condition 4’ of the draft Bill, since they would exercise “significant influence or control” over the trustees, it is likely that this information would never be made known to the Register. Recommendations 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. Because of its importance in preventing the use of trusts in money laundering, we recommend that the TRS be publicly accessible. 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. 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.
Information will not be subject to routine verification Chapter 5: Information held on the Register	There is no provision in the draft Bill for the information provided by entities to be systematically verified. This could enable someone with malign intent to provide false information, undermining the draft Bill’s aim to increase transparency. While we acknowledge that the provision of false information will be an offence under Clause 28 of the Bill, enforcement measures may not represent a sufficient deterrent. Recommendations The Government should ensure that the Register include a mechanism allowing users of the Register to “flag” suspicious or potentially incorrect information and that mechanisms are in place to examine this information. It could replicate the successful ‘Report it Now’ function of the Companies House register in its design of the Register of Overseas Entities. We urge the Government to move forward as quickly as possible with reforming the role of Companies House to ensure that it can conduct checks on the veracity of the information that it holds. We recommend that Companies House be provided with sufficient resources to undertake these additional tasks. We therefore recommend that the Government should explore the viability of requiring regulated professionals to verify beneficial ownership information submitted to the Register.
Certain property is out of scope of the draft Bill Chapter 6: Enforcement	Entities owning property registered before December 2014 in Scotland, January 1999 in England and Wales, and before commencement of the Bill in Northern Ireland, will not be required to register their beneficial ownership information. Such property could be sold and used for money laundering purposes. Recommendations 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). 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.
Criminal sanctions may be unenforceable, and fines may not be a sufficient deterrent Chapter 6: Enforcement	Criminal fines may be seen by fraudsters as a “cost of doing business”. It is possible that the criminal sanctions outlined in the Bill will be difficult to enforce against individuals resident in other jurisdictions. In practice, it may be possible to flout the provisions of the draft Bill with impunity. Recommendations 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.

List of possible loopholes in the draft Bill

Trusts are not included within the definition of “overseas entities”

Chapter 3: Structures required to register

The definition of “overseas entity” contained in Clause 2 does not encompass trusts. They are not, therefore, required to register. Though the Government argues that other current and future measures will require the registration of trusts, such registers will not be public. Furthermore, the land registries will have no ability to restrict transactions by non-registered trusts.

Someone wishing to launder money could establish a trust, allowing the trustees to hold property on their behalf. Although the trust would usually be recorded by the Trust Registration Service, this would not be public information. Moreover, although the ultimate owner would be caught by ‘Condition 4’ of the draft Bill, since they would exercise “significant influence or control” over the trustees, it is likely that this information would never be made known to the Register.

Recommendations

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.

Because of its importance in preventing the use of trusts in money laundering, we recommend that the TRS be publicly accessible.

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.

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.

Information will not be subject to routine verification

Chapter 5: Information held on the Register

There is no provision in the draft Bill for the information provided by entities to be systematically verified. This could enable someone with malign intent to provide false information, undermining the draft Bill’s aim to increase transparency.

While we acknowledge that the provision of false information will be an offence under Clause 28 of the Bill, enforcement measures may not represent a sufficient deterrent.

Recommendations

The Government should ensure that the Register include a mechanism allowing users of the Register to “flag” suspicious or potentially incorrect information and that mechanisms are in place to examine this information. It could replicate the successful ‘Report it Now’ function of the Companies House register in its design of the Register of Overseas Entities.

We urge the Government to move forward as quickly as possible with reforming the role of Companies House to ensure that it can conduct checks on the veracity of the information that it holds. We recommend that Companies House be provided with sufficient resources to undertake these additional tasks.

We therefore recommend that the Government should explore the viability of requiring regulated professionals to verify beneficial ownership information submitted to the Register.

Certain property is out of scope of the draft Bill

Chapter 6: Enforcement

Entities owning property registered before December 2014 in Scotland, January 1999 in England and Wales, and before commencement of the Bill in Northern Ireland, will not be required to register their beneficial ownership information.

Such property could be sold and used for money laundering purposes.

Recommendations

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).

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.

Criminal sanctions may be unenforceable, and fines may not be a sufficient deterrent

Chapter 6: Enforcement

Criminal fines may be seen by fraudsters as a “cost of doing business”.

It is possible that the criminal sanctions outlined in the Bill will be difficult to enforce against individuals resident in other jurisdictions.

In practice, it may be possible to flout the provisions of the draft Bill with impunity.

Recommendations

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.

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