New register, new risks

The Register of Overseas Entities (“ROE”) was introduced by the Economic Crime (Transparency and Enforcement) Act 2022 and is held by Companies House. The entities to be registered in it are those which are governed by the law of a country or territory outside the United Kingdom and which own land or property in the UK.
From 5 September 2022, the Keeper is required by sched 4 to reject any application to register a deed in favour of such an entity which does not contain an ROE registration number, and from 1 February 2023 to reject any deed granted by such an entity without a registration number.
In order to be registered, an entity must submit information about itself and its property transactions, but must also provide evidence of verification of identity. This verification is covered separately from the Act, in the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022. Subject to some exceptions, those permitted to carry out such verification are the same as provided for in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which includes solicitors.
Much has been written by legal firms and regulators north and south of the border about the introduction of the ROE and the verification process, so the purpose of this article is to focus on the risks that introduction of the register presents and provide some practical suggestions to help firms ensure compliance and manage client expectations.
1. What are the key risks for solicitors?
There are significant risks around the new verification process. Solicitors who don’t get up to speed with the new rules could potentially face Master Policy claims from clients. Failure by a client to register in the ROE could mean that the client is unable to dispose of (or deal effectively with) property, and where such failure was caused by a solicitor’s advice (or lack thereof) the client could make a claim against that solicitor for the financial loss suffered as a result.
There might also be a risk of claims for loss of a chance or the loss of a potential profit on a property transaction where a solicitor fails to verify beneficial owners. The requirement in the Act to update the register annually could also result in claims, if solicitors fail to advise clients of the need for updates or if it is not made clear in the scope of work in the letter of engagement whether such updates will be dealt with by the firm.
Solicitors may also be at risk of claims from lenders. The new rules will have an impact on securities over property held by overseas entities, meaning lenders might review their existing portfolios (as well as their back book, given that the Act has retrospective effect), and take steps to ensure borrowers have registered in the ROE where required to. This could potentially result in claims against solicitors if they have failed to ensure compliance with the new rules.
In addition, solicitors may be exposed to criminal and regulatory proceedings where they fail to comply with the strict requirements of the verification process, so great care should be taken in this regard.
2. What do solicitors need to do?
It is critical that solicitors understand the requirement to register beneficial owners, and firms should review the legislation thoroughly and make appropriate arrangements for how they intend to deal with the changes. Companies House issued guidance on the registration and verification requirements for overseas companies on 1 August. The Law Society of Scotland has published information bringing the ROE to the attention of the profession, and signposting the articles of guidance by the UK Government. It would be sensible for solicitors to familiarise themselves with the guidance from the UK Government and any of their own internal policies on the ROE and verification. It is worth noting that the steps to be taken for overseas entity verification go beyond what solicitors may be used to in relation to AML requirements, so it is not simply a case of replicating the checks already carried out.
As existing property registration processes are usually completed by solicitors, there might be an expectation on the part of clients that the solicitor will deal with ROE requirements too. Some firms currently offer a corporate director or trustee service, and they may decide to include this verification process as part of their offering.
As always, effective client communication will be critical – a law firm will need to be clear about whether it will carry out the ROE verification process, what it will need from the client in order to do so and what it will charge. Solicitors might be interested to note that the Law Society of England & Wales’s guidance on ROE states: “We anticipate that many firms will conclude that they are unable or unwilling to conduct ROE verification.”
Firms should also consider the requirement for annual updates to the ROE, similar to the three-yearly LBTT reporting requirement for leases, and consider whether they are prepared to take on the responsibility of diarising and complying with that requirement. Where firms are not prepared to take that on, they should consider explaining that position clearly to the client and explicitly exclude such updates from the scope of work in the letter of engagement.
It is likely that law firms will want to write to relevant clients regarding the requirements and obligations.
The practical steps that solicitors will take might well depend on the area of practice:
- Commercial property solicitors (and indeed any property solicitors acting for clients based overseas) will want to consider how their clients’ transactions will achieve compliance with the Act. They might want to consider writing to any clients with property transactions that are caught by the legislation, identifying the registration requirements and obligations. They should also think about the potential impact of the legislation on leases and subleases.
- Solicitors that work in areas of private client and tax might need to review their transactions against the new rules and contact any client that might be affected.
- For solicitors involved in corporate M&A transactions, specific drafting and due diligence might be required where deals involve the acquisition or disposal of properties by overseas entities. Great care should be taken in relation to the independent verification of the information about registered beneficial owners and in relation to the corporate filings at Companies House.
Regardless of the area of practice, firms will need to keep up to date with how the changes might affect their clients. In all cases, firms should be clear with their clients about the scope of a piece of work and whether that includes ROE verification. Above all, caution should be exercised before a firm chooses to carry out verification, and the circumstances of each request should be considered individually.
Handle with care
The ROE was introduced recently with the intention of increasing transparency on who owns or controls overseas entities owning property in the UK. The new rules are likely to have significant implications for law firms over the next few months. Great care will need to be taken by solicitors verifying identity, operating corporate filings at Companies House and acting in property transactions, to ensure compliance and to avoid penalties, Master Policy claims and potential criminal exposure.
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