Property: Transparency, human rights and the registers

We can probably all agree that undesirable activities in any self-respecting liberal democracy include unlawful tax evasion, money laundering and the hiding of illicit wealth.

And if one is a money launderer or a tax evader or wishes to hide one’s illicit wealth, then being able to use opaque offshore corporate or trust structures to, in effect, hide one’s beneficial ownership of UK corporates or real estate is more than just helpful – one might say it is positively enabling.

The UK Government has legislated for three corporate beneficial ownership registers that must be kept up to date on pain of criminal and civil sanctions, to make it more difficult to hide illicit wealth. However, similar registers maintained in the EEA have been held to be unlawful by the EU Court of Justice on the basis of human rights legislation. What, if anything, does this mean for the UK registers?

The three registers set up in the UK to address this issue are:

The Register of People with Significant Control (“PSC”), maintained by Companies House, brought into being by the Small Business, Enterprise and Employment Act 2015, introducing part 21A to the Companies Act 2006. The following UK entities must maintain a PSC Register at Companies House:

- all limited companies (except certain listed companies);

- all limited liability partnerships;

- Scottish limited partnerships;

- Scottish qualifying partnerships.

The PSC rules are complex, but the net effect is that any natural person who is, directly or indirectly, an ultimate beneficial owner (“UBO”) of voting rights or equity interests (i.e. shares or membership or partnership interests) representing a controlling influence in any such entity must be capable of being identified by anyone through publicly available and searchable registers.

The Register of Overseas Entities (“ROE”), maintained by Companies House, created through the Economic Crime (Transparency and Enforcement) Act 2022 (“ECTEA”). ECTEA applies to all UK real estate and therefore affects the following land registers:

- in England & Wales, HM Land Registry;

- in Scotland, the General Register of Sasines and the Land Register of Scotland;

- in Northern Ireland, the Land Registry.

The ECTEA rules on beneficial ownership are based on the PSC rules and take effect in similar terms: where an entity (which will include a trust in some contexts) registered, incorporated or established in an overseas country owns (or in certain cases, leases) UK real estate, that entity must be registered in the ROE together with prescribed information such that any UBO of the entity must be capable of being identified by anyone through publicly available and searchable registers.

ECTEA takes retrospective effect, so that overseas entities which acquired real estate situated in England & Wales on or after 1 January 1999 but before 1 August 2022, or in Scotland on or after 8 December 2014 but before 1 August 2022, have until 31 January 2023 to register.

From 5 September 2022, overseas entities must register in the ROE before they can acquire ownership of land or certain leases anywhere in the UK.

The UK Trust Registration Service (“TRS”), maintained by HM Revenue & Customs, set up in 2017 to satisfy the Anti-Money Laundering Directive (EU) 2015/849 (as amended, the “AML Directive”) and UK implementing legislation. New rules came into force in October 2020 that require all UK trusts, with a few exceptions, and some non-UK trusts to register with HMRC.

Previously, only trusts that paid certain taxes were required to register with TRS. 

The data on TRS are only available to those with a “legitimate interest”, such as law enforcement agencies investigating money laundering and the financing of terrorist activities. HMRC can refuse access where there is a disproportionate risk of exposing the beneficial owner to, for example, fraud, blackmail, or intimidation.

In addition to these three UK-wide registers, in Scotland another new transparency register, the Register of Persons Holding a Controlled Interest in Land (“RCI”) was introduced in April 2022. Its primary purpose is to increase transparency regarding individuals who have control over decision-making in relation to land, enabling communities and individuals to identify more easily who they should engage with on decisions about the land. The RCI is relevant to certain categories of owners of Scottish land (individuals, partnerships, trusts, unincorporated bodies or overseas entities) as well as tenants of Scottish registrable leases, where another party has significant influence or control over such decisions and that controlling interest is not transparent. Information about such controlling “associates” is to be publicly available and searchable in the RCI.

In this article, we refer to all four registers as “UK registers”.

International parallels

Similar registers have been brought into effect across the European Economic Area, in an international drive towards transparency of ownership in the battle against organised crime and unlawful tax evasion. 

But what if the effects of human rights charters and legislation were not considered in this regard? And what if a court were to hold that such registers were incompatible with, for example, a fundamental human right to respect for private and family life?

In fact, that is precisely what happened when the EU Court of Justice considered two challenges (WM (C-37/20) and Sovim SA (C-601/20)) to the laws of Luxembourg as regards the Register of Beneficial Owners in that jurisdiction, in the context of both the AML Directive and the EU Charter of Fundamental Rights (the “EU Charter”).

What implications might this case have for the validity of the UK registers?

The CJEU case 

The case involved a referral from the Luxembourg District Court in connection with the register set up to implement the relevant section of the AML Directive. The Luxembourg register applies to UBOs of corporate entities incorporated or established in Luxembourg.

Sovim SA applied to the Luxembourg Business Register (”LBR”) to have its UBO information restricted so that it was accessible only by “national authorities, credit institutions, financial institutions, bailiffs and notaries acting in their capacity as public officers”, and not by the general public, on the basis that UBOs would otherwise be exposed to a “disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation”. The LBR refused the application and Sovim brought the present proceedings arguing, inter alia, that granting public access to the identity and personal data of its UBO would infringe the right to respect for private and family life, and the right to the protection of personal data, enshrined respectively in articles 7 and 8 of the EU Charter.

The Luxembourg court stayed proceedings and referred this and other questions to the CJEU for a preliminary ruling.

Article 7 of the EU Charter provides: “Everyone has the right to respect for his or her private and family life, home and communications.” Article 8 relates to the right to protection of personal data, which finds broader effect in an EU perspective under the GDPR: Regulation (EU) 2016/679. Being an EU regulation, the GDPR has direct effect across all EEA countries.

The EU Charter occupies a slightly incongruous position in EU law, in the sense that it is not directly binding law, but must be complied with by EU institutions when promulgating, and by EEA countries when passing domestic laws which give effect to or amplify, EU directives and regulations.

The CJEU agreed with Sovim and held that making information regarding beneficial owners available in a register searchable by the general public in Luxembourg was inconsistent with articles 7 and 8. The following passages of the judgment are worthy of note:

• At para 39: “It should also be noted that, as is apparent from the court’s settled case law, making personal data available to third parties constitutes an interference with the fundamental rights enshrined in articles 7 and 8 of the Charter, whatever the subsequent use of the information communicated. In that connection, it does not matter whether the information in question relating to private life is sensitive or whether the persons concerned have been inconvenienced in any way on account of that interference.”
• At paras 41-44: “As regards the seriousness of that interference, it is important to note that, in so far as the information made available to the general public relates to the identity of the beneficial owner as well as to the nature and extent of the beneficial interest held in corporate or other legal entities, that information is capable of enabling a profile to be drawn up concerning certain personal identifying data more or less extensive in nature…
  “In addition, it is inherent in making that information available to the general public in such a manner that it is then accessible to a potentially unlimited number of persons, with the result that such processing of personal data is liable to enable that information to be freely accessed also by persons who, for reasons unrelated to the objective pursued by that measure, seek to find out about, inter alia, the material and financial situation of a beneficial owner.
  “Furthermore, the potential consequences for the data subjects resulting from possible abuse of their personal data are exacerbated by the fact that, once those data have been made available to the general public, they can not only be freely consulted, but also retained and disseminated and that, in the event of such successive processing, it becomes increasingly difficult, or even illusory, for those data subjects to defend themselves effectively against abuse.
  “Accordingly, the general public’s access to information on beneficial ownership… constitutes a serious interference with the fundamental rights enshrined in articles 7 and 8 of the [EU] Charter.”

What this judgment means is that any register of beneficial owners maintained in an EEA country which identifies the UBO of an applicable entity and the extent of that UBO’s interest, and makes that information available to the general public, is unlawful since it constitutes a serious interference with the fundamental rights enshrined in articles 7 and 8 of the EU Charter. Indeed, we understand that the Netherlands has as a result ordered the closure of its Register of Beneficial Owners, and no doubt other EEA countries will follow suit.

Brexit and all that

Those of you who have not fallen asleep by this stage will no doubt be wondering what all this has to do with the UK, given that this country is no longer a member of the European Union – especially since the UK legislation which gave effect to Brexit specifically clarified that the EU Charter was not an adopted EU law in the UK: European Union (Withdrawal) Act 2018, s 5(4).

While that is undoubtedly correct, the position in the UK is more nuanced for two reasons:

1. First, while the EU Charter is not part of UK law, the European Convention on Human Rights is very much part of UK law through the Human Rights Act 1998. Article 8 of the ECHR sets out a “right to respect for private and family life” in very similar terms to article 7 of the EU Charter: “Everyone has the right to respect for his private and family life, his home and his correspondence.”

The ECHR differs from the EU Charter in that it clarifies at article 8(2) that there “shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others”. We refer to that as the “public interest exemption”. The EU Charter contains no equivalent provision.

2. Secondly, the UK has adopted the GDPR into law, since modifying it through the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019/419 (as so modified, the “UK GDPR”). Further, through the Data Protection Act 2018, the UK has in certain respects adopted more stringent data protection rules than those required under the original GDPR text. So while there is no equivalent human right in the ECHR to article 8 of the EU Charter, nevertheless data protection is undoubtedly a fundamental right under UK law directly actionable in the courts, ultimately deriving from EU law.

Accordingly, the CJEU judgment can be considered to be persuasive, perhaps highly so, in the context of the ECHR article 8 right to respect for private and family life. Accordingly, if an applicable legal entity or its UBO were to argue in a UK court that any of the publicly searchable UK registers (the PSC Register, the ROE and the RCI, but not at present the TRS) contravened either article 8 of the ECHR or the GDPR, this judgment may well be given considerable weight by the UK court.

Having said that, article 8 of the ECHR is subject to the public interest exemption whereas article 7 of the EU Charter is not. A UK court may therefore conclude that the exemption applies in a manner which takes the UK registers outside the protection provided by article 8. As regards the UK GDPR, it seems likely that the processing of personal data for the purposes of the UK registers will be justified on the basis of the legal obligations set out in the applicable legislation (see article 6(1)(c) of the UK GDPR), and in addition that the exemption from data protection obligations in para 5(1) of sched 2 to the Data Protection Act 2018 will apply to the publication of certain personal data on these UK registers.

Nevertheless, the ultimate arbiter of the ECHR is the European Court of Human Rights in Strasbourg such that, even if the UK Supreme Court were to hold that the ECHR was inapplicable or not engaged (through the public interest exemption or otherwise), a litigant could apply to the Strasbourg court. That court might be persuaded to follow the reasoning of the CJEU (a fellow European court) in this regard, particularly given that the EU Charter and the ECHR are in more or less identical terms, subject to the public interest exemption.

If the Strasbourg court found itself persuaded by the CJEU’s general approach, it might not pay as much cognisance to the exemption as one might expect a UK court to. This is because the CJEU recognised that there is a balancing act which needs to be struck between the aims of a particular piece of legislation (in this case, the AML Directive and the Luxembourg legislation) and the public interest in seeing that those aims are achieved, on the one hand, and on the other hand ensuring that the effects of the legislation do not give rise to a disproportionately serious interference with the fundamental rights protected in the EU Charter.

It is therefore entirely possible that the European Court of Human Rights would consider the UK registers to be disproportionate in effect in the sense of the CJEU ruling.

Conclusions

It is difficult to say how the CJEU judgment will play out in countries which are not in the European Economic Area and which are therefore not subject to its jurisdiction. However, there must now be considered to be some risk that the PSC Register, the ROE and the RCI in the UK are incompatible with article 8 of the ECHR. No doubt the UK and Scottish Governments consider otherwise, and ultimately the UK Parliament at Westminster is sovereign. But we cannot discount the possibility that the judgment will give rise to ECHR challenges to the UK registers in the UK courts (noting that the Human Rights Act 1998 is also an Act of the UK Parliament). And while the UK courts might seek to give effect to UK Acts of Parliament so far as possible, perhaps relying on the public interest exemption, the European Court of Human Rights is more likely to consider itself persuaded, and possibly even bound, by the approach of the CJEU as regards a fundamental human right in the EU Charter which is in almost identical terms to the equivalent human right in the ECHR, subject to the public interest exemption.

What we think we are also seeing here is a sudden halt to the inexorable momentum in international affairs towards absolute transparency of ownership in the fight against organised crime and tax evasion. Countries may well have to consider whether maintaining publicly searchable registers of this nature is in fact proportionate in a wider sense, including as regards human rights. In this context, it may be necessary for the UK Government (and the Scottish Government as regards the RCI) to restrict access to the UK registers to those who can show a legitimate interest in accessing the information, or even to close down the UK registers completely.

This article originally appeared in slightly expanded form on the Morton Fraser website