The Register of Overseas Entities – Impending Companies House enforcement action, should I be worried?

Secondary legislation, which comes into force next week on 21 June 2023, looks set to spark a crackdown by Companies House on overseas entities in breach of their obligation to register to the UK’s new Register of Overseas Entities (ROE).

This secondary legislation, in the form of The Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023 (the Regulations), will give Companies House powers to impose financial penalties for offences relating to the ROE.

The Secretary of State for Business and Trade has confirmed that Companies House has been “preparing to operationalise the regulations and will be ready to issue notices as soon as the regulations come into force”. This represents a marked change from the pragmatic approach to enforcement taken by Companies House to date. 

If you are one of the 15% of overseas entities currently in breach of their obligation to register to the ROE, here is what to do:

A quick recap

The ROE was launched on 1 August 2022 by the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA). ECTEA gave overseas entities owning UK property a six-month transitional period, running until 31 January 2023, to register their beneficial ownership with Companies House.

Whilst beneficial ownership analysis can appear daunting, as we previously explained here, with a proper understanding of how the ROE dovetails with existing reporting regimes, the process isn’t as burdensome as it first seems.

What are the consequences of missing the deadline?

• Restrictions on dispositions: The Land Registry has applied restrictions to the registered titles of all UK property owned by overseas entities which, subject to some exceptions, effectively prevent the relevant overseas entities from selling, completing material leases of or charging that property until the relevant overseas entity is registered to the ROE.
• Criminal penalties: The overseas entity, and each of its officers who are in default, commit an offence. A person found guilty may be liable for a fine and/or imprisonment.
• Civil penalties: From 21 June 2023, the Regulations will give Companies House power to impose financial penalties where it is satisfied, beyond reasonable doubt, that the person has engaged in conduct amounting to an offence under ECTEA. There is no cap on the level of fines which Companies House may impose for the failure to register offence. Nevertheless, the Secretary of State for Business and Trade has indicated that the starting point for fines will depend on which of three bands the property falls into, based on its estimated value. Lower band fines will start at £10,000, middle band fines at £20,000 and higher band fines at £50,000. Where the overseas entity owns more than one property, a fine will be charged to each property in its portfolio. With interest on unpaid penalties accruing at 8%, sizeable penalties will quickly rack up.

For at least the medium term, we expect Companies House to focus its enforcement action on applying civil financial penalties, with criminal penalties reserved for the most serious of cases.

What action should you take next?

Your number one focus should be making the filings to register to the ROE as soon as possible. If Companies House has been in touch flagging the offence and an indication of the consequences, you should swiftly engage with them. You should demonstrate that you are doing everything you can to make the filings as soon as possible and advise Companies House of the verification agent you have engaged to execute the filings, as well as your timings for submission.

It may be tempting to seek a waiver of the threat of criminal penalties, but we would be very surprised to see Companies House give any formal waiver, and doubt it has the power to do so in any event.

The restrictions against dispositions applied to the registered titles by the Land Registry, as referred to above, are worded in a way that they won’t bite once the overseas entity is registered to the ROE. Future sales, applicable leases and charges will therefore be unaffected so no application to the Land Registry is required.

Anything else to be aware of?

Any overseas entity which was required to register to the ROE but failed to do so by the 31 January 2023 deadline has committed an offence under ECTEA. There is a risk that this could trip any general compliance with laws covenants the overseas entity has given, for example, in any existing loan documents, putting the overseas entity in breach of the terms of its financings.

Similarly, you should be aware that the offence, and relating contingent criminal or civil liability, would need to be disclosed against any reps under new loan documents or standard SPA warranties on a potential future sale of the overseas entity.

The last chance?

With the Secretary of State for Business and Trade indicating that enforcement action is coming, this next week may represent the last chance for overseas entities to register to the ROE without facing penal consequences. There is no time to waste.