Law firm

Law on economic crime and risk for law firms

The Economic Crimes (Transparency and Enforcement) Act 2022 was recently introduced, and delegated legislation and subsequent changes at Companies House are expected to combine to have significant implications for law firms over the coming months. The Law Society of England & Wales published a note on March 16, 2022, with another note on July 21.

This legislation will create a register of beneficial owners at Companies House for foreign entities holding property in the UK so that ultimate ownership and control is clear. According to the Law Society, the law “allows investigators to target people who manage properties in complicated offshore arrangements, even if they are not the true beneficiary”, and allows the Office of the Implementation of financial penalties to fine companies for violations in the event of knowledge. or reasonable cause to suspect violations, as well as naming them publicly even if no fine is imposed.

The law is partly retrospective – requiring the identification of beneficial owners by registration in respect of properties owned by foreign companies which have purchased in the past 20 years in England and Wales (eight years in Scotland). Failure to identify will result in the freezing of properties.

Lawyers are identified with other entities (accountants, banks, real estate agents) as “supervised agents” (in accordance with money laundering regulations) and can verify prescribed information, in accordance with legal requirements, and there are potential criminal penalties for breaking the rules. . Those who work or work on behalf of the foreign entity can also complete the Foreign Entity Register. However, government guidance stresses that it is “quicker and easier for an overseas entity to be registered by the same regulated agent in the UK who carried out their checks”, who in many cases will be the legal professional. of the entity.

This is an important topic on its own, but we wanted to address what we see as risk implications for businesses and provide some practical ideas to help manage how this affects customers:

All the domains : Identify pending and recently completed transactions involving foreign companies that may own assets and determine if beneficial ownership is already clear. If not, establish whether the company has received and can verify the information. If not, indicate how compliance could be achieved and whether the company will or is obligated to do so given the mandate.

  • Immovable departments:
    • Consider writing to affected customers with pending and recently completed transactions, identifying registration requirements and obligations. Identify if you will undertake the process, what you will need to do, what you will charge – be clear that charges will apply whether you are able to verify or not. If purchasing from foreign companies, establish how compliance will be achieved and consider making compliance a contractual requirement.
    • Sublets and sublets – are senior landlords potentially covered by the legislation? If so, review and indicate what the effect of non-compliance might be in terms of obtaining licenses to assign/modify or serve notices.
    • Check past transactions for current customers to see if past transactions are covered by legislation. Consider writing to them explaining the impact and whether or not you are happy to take action and on what terms.
  • Corporate/commercial management acquisitions, divestitures and restructurings, and financing documentation involving overseas entities holding property in the UK may require review and consideration of amendments to reflect requirements and the impact if ownership is frozen.
  • Real estate and private client and tax litigation departments are likely to have to carry out similar examinations. There may be tax implications to consider when identifying ultimate beneficiaries, and past approaches of the company or previous advisers may need to be reviewed.
  • Dispute settlement where ownership and foreign ownership are involved, companies may need to warn customers. It would be embarrassing if the non-compliance were raised out of the blue with a client in cross-examination.
  • Immigration guests staying at overseas owned premises may need to be warned that owner non-compliance could be raised as an objection/tactical point.

This is a non-exhaustive list and the position evolves as guidance is published; businesses will need to keep abreast of the changes. A Law Society practice note on auditing has been published. In terms of insurance implications:

  • Fines and penalties against the business or individuals are excluded from many policies.
  • If errors or delays occur and affect customers (eg, resulting in loss or penalty to them), negligence claims against the company may follow. Refusal to verify beneficial ownership information based on a misunderstanding of requirements, or failure to advise customers of the need to register and/or the implications of a delay in providing information, could well result in losses for customers for which claims could be made which may or may not be justified. There is a good basis for asserting that such claims fall under professional indemnity cover, subject to terms and conditions (e.g. dishonesty).
  • It seems reasonable to ensure that anyone providing auditing services has had formal training or spent time studying the Act and the practice notes and guidelines as they appear. As with many practice areas, it appears that creating a record of the processes undertaken leading up to verification will be a sensible step in each case, bearing in mind that the process can vary in complexity depending on the scenario. Keep in mind that new legislation often creates new sources of claims against law firms. Businesses may consider restricting who can verify and/or requiring four-eye verification of verifications provided to customers as the process becomes more integrated and better understood.

Stakeholders such as insurers, regulators and banks are likely to request information regarding the affected customers and business. It would be wise to create procedures for identifying, assessing and following up on customers triggering these requirements so that rapid responses can be given.