The Economic Crime Act has received Royal Assent: here’s what it means for UK businesses

Russia’s invasion of Ukraine has already had a major impact on businesses and individuals across the globe.

These effects range from increased petrol prices and fertilizer shortages to sporadic supply chain disruptions. But one of the biggest economic consequences of the war taking place here in Britain is the introduction of the UK Government’s new Economic Crime (Transparency and Enforcement) Act.

The Economic Crime (Transparency and Enforcement) Act received Royal Assent on March 15 after getting streamlined through UK Parliament. Portions of the Act had actually already been in the works for some time. Yet because several of the measures included powers to help the UK crackdown on questionable Russian economic activity here in the UK, the Act benefited from an expedited passage through both houses.

Simply put, the UK Government has said that the new legislation will mean the government can move far more quickly to impose sanctions against Russian oligarchs, as well as to intensify the enforcement of western sanctions against the Russian state and its major players.

It can’t be denied that the UK — and London in particular — has established a reputation over recent decades as a welcoming economic haven for powerful players within Russian society. According to UK politicians, the passage of this latest economic crime bill will create fine lines concerning how Russian spending will (and won’t) be welcome in Britain moving forward.

“Our Economic Crime Act will enable us to crack down harder and faster on dirty money and those who support Putin and his regime,” explained Chancellor of the Exchequer Rishi Sunak in a government release that coincided with the bill’s approval.

“We are using all of our financial might to send a clear message to the Kremlin that this criminal venture will end in total failure.”

Generally speaking, it seems to have been universally agreed upon by all sides of the political spectrum that the Act is a positive step forward to ensure that the UK is doing its part to impose sanctions against the Russian state. But it’s also important to note that these changes will affect quite a few UK businesses — and UK-based law firms in particular.

To help you understand how your UK business could be impacted by the government’s new Economic Crime Act, this guide will break down each aspect of the new legislation and what it means for British companies, partnerships, and sole traders.

Register of Overseas Entities

The first key change that’s been introduced by the Economic Crime Act is the creation of a new “Register of Overseas Entities”.

In plain English, this measure has created a new register of companies that will sit with Companies House. The register is going to be responsible for listing out all foreign-owned entities, making sure information about them and their ownership is always accessible in one, public place.

The register is going to require any and all overseas entities that own (or have a desire to own) UK property to share information about their beneficial owners. That information and the individuals concerned must then be registered with Companies House.

Any information supplied to Companies House for inclusion on the new register will need to be verified by the UK Government. Once verified, the entity concerned will then need to update its information annually. This is an important note for foreign companies operating in the UK because it represents another annual filing requirement that must be fulfilled.

Entities who refuse to reveal their “beneficial owner” will face tough restrictions if they decide to try and sell the property later on. More important still, those who break the rules could then face a fine of up to £2,500 per day or as much as five years in prison.

So, why has this register been created as part of the Economic Crime Act?

According to the UK Government, sifting through international corporate structures to understand who owns UK property enables government agencies to uncover and prevent illicit finance and money laundering activities from taking place in the UK.

“There is absolutely no room for illicit finance in the UK, and by bringing forward this Economic Crime Act at an unprecedented speed we’ve put Putin, and the corrupt elites propping him up, on notice,” UK Business Secretary Kwasi Kwarteng said after the bill received Royal approval.

“Our new Register of Overseas Entities, the first of its kind in the world, will have an immediate dissuasive effect on oligarchs attempting to hide their ill-gotten gains, ensuring that the UK is a place for legitimate business only.”

Unexplained wealth orders

Unexplained wealth orders (UWOs) are nothing new. In fact, they were introduced by the UK Government in 2017 as a new tool for law enforcement to prevent money laundering and other financial crimes.

Unfortunately, UWOs haven’t had a major impact on financial crimes in the UK due to the National Crime Agency’s lack of legal powers and financial resources to carry out and act upon these orders.

These issues are yet another item that this year’s Economic Crime Act is seeking to address.

Moving forward, the Economic Crime Act will allow NCA investigators to explore and target individuals and businesses managing properties that include complicated offshore arrangements — even if the parties concerned aren’t actual beneficiaries of that property’s ownership.

In addition, the NCA has now been given extra legal time to prepare UWO-related cases for court. The agency is also going to benefit from protection against having to pay huge legal costs associated with UWO cases. This is particularly critical, as many of the previous legal battles that have occurred as a result of UWO-related cases turn out to be incredibly time-consuming and costly.

New UK sanctions

To coincide with the Economic Crime Act’s launch, Prime Minister Boris Johnson has also announced a brand-new “Kleptocracy Cell” that will be based within the National Crime Agency.

The sole purpose of this new government subgroup will be to target sanctions evasion and hidden Russian assets here in the UK.

The Act has also introduced a “strict civil liability” test for financial penalties which are linked with government sanctions. In practice, this will mean that companies are going to face greater liability for breaking sanctions rules even if the business owners claim to have absolutely no knowledge or reason to suspect a transaction they’ve carried out broke sanctions.

By introducing this test, the Act is going to make it a whole lot easier for government law enforcement agencies to impose fines on UK businesses that break sanctions rules relating to Russia or any other sanctioned country or organisation.

These fines can be quite substantial, too.

At present, UK entities can be fined up to £1 million or 50% of the economic resources involved in a sanctions breach — whichever amount is greater.

In terms of who investigates and prosecutes suspected breaches of financial sanctions, responsibility will continue to rest with the UK Government’s Office for Financial Sanctions Implementation (OFSI).

But as part of the Act, it’s also worth noting that the OFSI has been given the power to publicly name and shame all organisations that breach financial sanctions rules — even if the organisation doesn’t get fined as a result of the breach.

Changes at Companies House

In tandem with the unveiling of the Economic Crime Act, the UK Government has simultaneously published a new white paper that sets out planned reforms it intends to enact at Companies House.

The first key reform is that any individual or entity that sets up runs, or owns a controlling interest in a UK limited company will be required to verify their identity with Companies House.

While a degree of this verification already exists in practice, moving forward Companies House will be handed the additional power to challenge the data that it receives if the data appears questionable in any way.

Companies House will then have the ability to liaise with security agencies like the NCA if it believes there is suspected illicit activity taking place.

Another reform expected to be enacted is that company formation agents operating from outside the UK will have stricter checks and rules in place on who creates companies here in the UK — namely oligarchs or foreign individuals convicted of committing crimes.

Moving forward

It’s important to note that the changes being introduced as part of the Economic Crime (Transparency and Enforcement) Act are going to impact a wide range of businesses operating in the UK’s corporate ecosystem.

But generally speaking, UK company owners shouldn’t experience any major disruptions as long as they observe the rules and understand any and all new filing requirements.

Likewise, you’ve got to bear in mind that there are more changes on the horizon. In addition to March’s Economic Crime Act, the UK Government has said it plans to introduce new powers to seize illicit crypto assets and has hinted at further reforms at Companies House. That’s why it’s critical that UK company owners and sole traders keep their ears to the ground and stay informed to ensure they are fully compliant with incoming legislation.

Want to catch up on more news about UK companies and corporate rules?

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