Bucharest – 3 May 2022. Having written in my previous article about the UK’s new National Security & Investment Act 2021 – and how it has the potential to impact trade and investment between the UK and Romania, it should not be thought that this is the end of the matter. Additional legislation – the Economic Crime (Transparency and Enforcement) Act 2022 (the “Economic Crime Act”) received Royal Assent on 15 March this year. The Economic Crime Act is also likely to have effects on international trade and on investment in real estate in the UK.
The Economic Crime Act has three distinct areas of application:
- providing for transparency of the ultimate beneficial owners of real estate in the UK;
- strengthening the use of Unexplained Wealth Orders; and
- making it easier to apply penalties for breaches of sanctions imposed by the UK.
Some of these changes apply now, others will be applied at a later date – but it is worth knowing what is coming.
So, what are the likely implications of these changes for business between Romania and the UK in general, and for readers of “TheBizz” in particular?
Broadly speaking, Unexplained Wealth Orders are a legal tool which the UK authorities can use where a person’s lifestyle in the UK is above their visible means of (legitimate) income. The changes made by the Economic Crime Act make it easier for Unexplained Wealth Orders to be pursued by the UK authorities. I however suspect – and hope – that readers of “TheBizz” are unlikely to be in the class of persons whose lifestyle presents a drastic mismatch with their visible sources of income, so I think that we can safely move on to the other two areas of application of this new legislation.
I also hope that readers of “TheBizz” are also unlikely to be involved in breaching sanctions imposed by the UK, but this is an area which can be expected to raise issues for international business and trade. The legislation regarding sanctions, “end users” and “dual-use” of exported items is long and detailed and is outside the scope of this article. The point is, however that the potential liability of sellers for breaching sanctions is made more likely by the Economic Crime Act. It does this by imposing a “strict civil liability” test for whether or not monetary penalties may be imposed for breaches of sanctions. This means that businesses face liability for civil penalties even where they have no knowledge – or reasonable cause to suspect – that a transaction to which they are party is in breach of sanctions. These are distinct from criminal penalties which may result from a prosecution based on actual knowledge – or reasonable cause to suspect – that sanctions were being breached. It should also be noted that even if no civil penalty is imposed, the UK authorities may “name and shame” businesses which are believed, on the balance of probabilities, to have breached sanctions.
So, faced with the possibility of a civil monetary penalty and / or reputational damage if it is inadvertently involved in breaching sanctions, a prudent business is likely to be much more careful in conducting due diligence on business partners and on protecting themselves in contracts. Readers should be ready to find that deals may take longer to be negotiated and settled as a result of the need to take extra care. Alternatively, be ready to help counterparts with information and documents which will make them feel comfortable that no sanctions will be broken if the deal goes through.
The other area of change introduced by the Economic Crime Act which I think is most likely to be relevant to the Romanian business sector is that dealing with the establishment of a register of foreign ownership. Unlike Romania, the UK has no restriction on the nationalities of purchasers and owners of real estate in the UK. This means that a Romanian company may be the legal owner of land in any part of the UK. The same is of course true of a British company, but British companies are already required to disclose their ultimate beneficial owners.
The Economic Crime Act introduces a similar requirement on foreign companies and entities which own real estate in the UK. It will do so by requiring foreign owners – and prospective owners – of real estate in the UK to register themselves. Foreign owners / prospective owners are non-UK companies or similar legal persons, as well as natural persons who exercise significant influence or control over such companies / legal entities.
Failure to register where required to do so may result in criminal and / or civil penalties, including restrictions on dealing with the real estate owned by a foreign company / legal entity.
The implementation of the register of foreign ownership is not yet complete, but it should be noted that the Economic Crime Act will apply retrospectively to real estate in England & Wales bought since January 1999 and to real estate in Scotland bought since December 2014. Romanian companies which already own real estate in the UK should therefore take note of this.
My view is however that this new requirement is unlikely to be a real obstacle to most Romanian investors in the UK. Romanian businesses extending their operations to the UK are, I suspect, more likely to conduct their operations through British subsidiary companies, which are already subject to rules on disclosure of ultimate beneficial ownership. The UK real estate market is of course an attractive one and should Romanian investors have invested in it through a Romanian company – or indeed any other non-UK legal entity, they should start planning to deal with the necessary registration, which should not be too burdensome.
Even so, it cannot be denied that the Economic Crime Act is likely to impose some measure of burdens on doing business generally and on investing in UK real estate. Since the Act is however intended to address identified weaknesses in the UK’s anti-money laundering legislation, it is to be hoped that its successful application will make the world a safer place for us all.