Amendment 3

Economic Crime (Transparency and Enforcement) Bill - Committee – in the House of Lords at 5:00 pm on 14th March 2022.

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Lord Agnew of Oulton:

Moved by Lord Agnew of Oulton

3: Clause 4, page 3, line 21, at end insert—“(3A) The registrar may request further information to be provided in a timely manner where there appear to be material omissions or suspected false statements.(3B) An application may not be accepted unless the registrar is satisfied that any request for further information has been adequately addressed.”

Photo of Lord Agnew of Oulton Lord Agnew of Oulton Conservative

I really want to carry on in a similar vein to earlier comments, and what my Amendment 3 is trying to do is to give more levers to government and enforcement agencies to force out information when we are worried that the information is not clear. My noble friend made the point that the Explanatory Notes say that this will be subject to regulations, but those regulations will be subject to a negative resolution. Could my noble friend confirm that we could be involved in the drafting of those regulations, rather than being faced with a fait accompli at the last minute, because I think there is a lot more to be done here? This perhaps plays to my noble friend’s point about the iterative improvements this Bill is going to need over the next few years, because it is fiendishly complicated.

The other piece to this jigsaw is the likelihood of prosecution of bad actors. Having been in business many years, I am afraid that the phrase that has often been offered to me when one is trying to get things done is “It’s the cost of doing business.” If the fines are so weak and the enforcement so inconsistent, it sends a message to those bad actors to continue, because—let us be realistic—is the NCA or Companies House, or any of these other people, going to take an action against a promoter in the British Virgin Islands for £10,000 of unpaid fees? It is just not going to happen, unless we are very clear that there is a mechanism for that to happen and that the fines very quickly get to a level that makes it worth while for litigators, acting on behalf of the taxpayer and the Government, to do that. I beg to move.

Photo of Lord Sikka Lord Sikka Labour

My Lords, I rise to speak to a number of amendments in my name in this group—there are eight of them—and I will be fairly brief.

First, Amendments 5 and 13 basically ask the beneficial owners and various other parties to provide their former names. In Part 4 of Schedule 1, the Bill requires managing officers who are managing the beneficial owner’s interest to provide their former names. But the same is somehow not required for registerable beneficial owners where they are persons other than individuals—which could be companies that are forever changing their names, or other parties. What I am seeking to do through Amendments 5 and 13 is to, as it were, align the various provisions in the Bill, and I hope that the Government will be agreeable to that.

Amendments 8, 12 and 14 require the beneficial owners, or their managing agents et cetera, to provide a list of any criminal convictions and sanctions against them. At the moment, the Bill does not ask for that kind of information, so it is perfectly possible for somebody to look at this proposed register of property ownership and not know that the ultimate beneficiaries have various convictions, which may well be abroad. It really exerts pressure on them to either come clean or to avoid the UK altogether—which perhaps would be more preferable. Again, it is a fairly straight forward suggestion asking the Government to act upon that.

The meatier part of my eight amendments relate to Amendments 18, 19 and 20, which take issue with the Government’s provision of the definition of registrable beneficial interest, generally taken to be 25% of the shares or voting rights, or somebody having significant influence or control. As it is now defined it is too wide. Indeed, the provision of any number is too wide. If you say it is 25%, it is not inconceivable that half a dozen people will get together and make sure that nobody gets to 25%. If you specify 20%, that will be exactly the same. So four, five or six drug traffickers can get together and own a fraction of a company, and through that they can invest their proceeds in a property. Under this kind of approach, none of them would be identified as a beneficial owner or count as a person of significant control, because they do not meet the thresholds specified in the Bill.

The Bill as presently drafted leaves open the possibility that companies holding UK property would continue to hide the identity of true owners by claiming that there was no beneficial owner. This is already a major problem at Companies House for the companies already registered in the UK. That has been identified by a number of whistleblowers and a number of leaks that we have had. However, rather than tackling the issue, the Government have imported these problems into the Bill, and it is quite likely that the Bill will not achieve its assumed objectives.

So I suggest that there should be no numerical specification of the beneficial interest definition; rather, any interest should be disclosable. It is not every day that ordinary individuals want to buy UK property through opaque offshore companies. They have a reason why they want to do this, so we must make sure that absolutely no door is open to them. By leaving this definition, the danger is that the Bill simply will not achieve its objectives. I therefore recommend my amendments to the Government in the hope that this will help to end the abuses.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords)

My Lords, I support most of the amendments in the group, including the government amendments, which are generally very helpful.

I will speak to Amendment 24 in my name and to the similar Amendment 23, in the name of the noble Baroness, Lady Chapman, both of which are intended to address the possibility of there being a very long period between a change in the ownership of the entity and that change being reported in the annual update. I thank the noble Lord, Lord Cromwell, for his support in this. Amendment 23 would require an update to be filed within 14 days of when a person has become or has ceased to be a registrable beneficial owner. My Amendment 24 is slightly wider, requiring any changes in registered information to be reported within 14 days. However, both amendments seek to bring the overseas entity regime into line with the persons of significant control regime that UK companies must follow. To be honest, I would be content either way.

As the Bill is currently drafted, an overseas entity could register and then immediately change its beneficial ownership and we would not get to know about that for a full year, during which time any number of actions could take place, including the sale of the property to an innocent third party who unwittingly might find themselves enriching a criminal or someone subject to sanctions.

The Bill rightly puts restrictions on the disposition and registration of property, but it does nothing to deal with the more likely scenario of the overseas entity itself, or indeed an entity further up the ownership chain, being sold; indeed, this 12-month grace period almost wilfully ignores that. It seems rather perverse that the overseas entity regime should be more benign than the regime that applies to persons of significant control for UK companies.

In his helpful all-Peers letter of Friday, the Minister explained that the reason they have done it this way is to protect innocent third-party buyers from not being able to register the purchase of a property if the overseas entity turns out to be in breach of the requirement to report a change. That is obviously extremely important. However, a very simple solution is already built into the Bill. The overseas entity has the ability, under Clause 7(8), to shorten the update period and file an update immediately before it sells. Any innocent buyer would simply insist that this happens before the sale is completed, and that would deal with the problem that the Minister explained. Accordingly, I see no reason why one of Amendments 23 or 24 should not be accepted, so that overseas entities would have the same reporting requirements as UK companies have. The whole point of the overseas entity register is that we should know who beneficially owns UK properties. Allowing that information to be potentially up to 12 months out of date cannot make sense. I cannot think of any other corporate register that would allow such a long period to notify changes.

Given the urgency, I will not divide the House, but this is just another example of a matter that requires proper, unrushed discussion, and I hope the noble Lord is ready to have those discussions as we progress through the wider economic crime landscape.

I want to comment also on Amendment 53 in the name of the noble Lords, Lord Clement-Jones and Lord Fox, and the noble Baroness, Lady Chapman. At Second Reading, the issue of enablers and how to disincentivise them was raised multiple times. The Minister referred to the UK’s existing robust system of anti-money laundering regulations, but he went on to rather undermine that by saying that the Solicitors Regulation Authority had issued only 14 fines in 2021 and that the Institute of Chartered Accountants in England and Wales had cancelled the membership of only six firms—I remind the House that I am a member of the ICAEW. These are tiny numbers given the acknowledged size of the problem, and the fines are almost irrelevant, averaging just £11,600 for solicitors and just £3,000 for accountants. That is self-evidently not enough to disincentivise the enablers, which must explain at least in part why London has become known as the “London Laundromat” or “Londongrad”. Amendment 53 goes some way to deal with this by creating an express offence if a professional fails to disclose knowledge or suspicion of false or misleading information to the registrar.

While I strongly support that, I would go further and introduce an active requirement that a regulated professional must make a positive statement, added to the register, that they have carried out their due diligence and have satisfied themselves that the information about beneficial ownership is correct. As I explained at Second Reading, there is a world of difference between a duty to report suspicions and an active requirement to confirm the information. In the former, the professional remains unnamed. They are only on the hook if a problem later becomes public. So they may feel that the risk of turning a blind eye is quite low, especially set against the small fines that they would face, which I mentioned earlier. Their reputation is not affected unless they get caught, which happens rarely. The noble Lord, Lord Cromwell, alluded to this in his Second Reading speech when he referred to certain bankers who seem surprisingly willing to act for apparently high-risk clients.

Making a positive statement that they have verified the information, on the record, would publicly associate the professional with the information registered. That would seriously concentrate their minds both reputation-wise and legally—they would be putting their reputation clearly on the line. There could be no wriggling off the hook because they relied on someone else. Turning a blind eye would be an active decision rather than a low-risk, passive decision not to say anything.

I considered adding an amendment to this effect, but it can more easily be dealt with in the regulations to be issued under Clause 16, particularly subsection (2)(c). Given the desire to pass the Bill quickly, I decided not to submit an amendment. However, it is an important point and I would like to follow this up as part of those regulations. Would the Minister be willing to meet with me and perhaps others to discuss the matter further?

Finally, the noble Lord, Lord Sikka, has tried to add a number of information requirements, all of which are sensible. I hope that the Minister will actively consider those under the powers to regulate in Clause 4.

Photo of Lord Eatwell Lord Eatwell Labour 5:15 pm, 14th March 2022

My Lords, I will make a couple of observations on the amendments put forward by my noble friends Lord Sikka and Lady Chapman, and the noble Lords, Lord Fox and Lord Agnew. These observations are based on my experience as chairman of the Jersey Financial Services Commission. The Bill as drafted is significantly weaker than the requirements for registration in Jersey. For example, on the point made by my noble friend Lord Sikka, under the Control of Borrowing (Jersey) Order, any interest can be required to be registered without one of these numerical levels.

Secondly, with respect to the amendment proposed by my noble friend Lady Chapman and others, in Jersey, the requirement is that a change of beneficial ownership be registered within 21 days. This 12-month period is really foolish. It provides an open door to misbehaviour.

I support my noble friends Lord Sikka and Lady Chapman and friends in the amendments they have put forward. We should be able to achieve at least the level of seriousness achieved in Jersey.

Photo of Lord Cromwell Lord Cromwell Crossbench

My Lords, there is clearly a great deal we can learn from Jersey and I am very happy to follow the noble Lord, Lord Eatwell.

I will speak to Amendment 24, to which I have added my name, and will also make a couple of comments on Amendment 53—there may be a slight sense of déjà vu, as my noble friend Lord Vaux has done the same.

In relation to Amendment 24, on page 3 of his very helpful all-Peers letter of 11 March, the Minister explains that Companies House would not know if a legal entity registered abroad was compliant with the 14-day rule. Likewise, this would not be visible to a third party, whereas that third party could be confident that, if an annual date had passed, the register would be up to date.

I am not convinced that that is so clear-cut or indeed helpful. This approach means that, for up to 12 months, an entity could keep hidden its change in ownership structure. Only at that point would it be in breach if it had not disclosed the change—or possibly multiple changes. Assuming—which may be a bold assumption given some of the entities—that the entity indeed complied with a 12-month date to reveal changes, this would still leave the third party in the dark for up to 12 months and the entity under no obligation to register the changes and having that as a defence. In short, it is possible for entities to game the system by carefully timing their changes. Twelve months, or even one month, can be a long time in business.

This also makes it possible for an entity to waste the time and resources of the acquirer and the regulatory and enforcement agencies if, for example, it becomes subject to sanctions based on its ownership but can claim, at a time to suit itself, that the affected owner or owners actually no longer own it. A 14-day limit greatly tightens the ability of both the registrar and any third party to see, at least in the case of compliant entities, any registered changes in as close to real time as is practicable.

Where entities are not compliant and fail to declare changes in this timely way, should this emerge in due course, it should give the third-party acquirer grounds for withdrawal and the authorities grounds for pursuit. This does leave an obligation on the registrar to ensure that entries are kept up to date, but that is a technological and resourcing issue perhaps better addressed in other amendments. For these reasons, I added my name to Amendment 24 and support it. I urge the Minister to rethink the 14-day requirement.

I shall now make a few comments on Amendment 53. In paragraph 4 on page 2 of the same letter, in relation to the purpose of the Bill, the Minister acknowledges that there will be those who seek to exploit opportunities to avoid it—he also referred to this earlier today. I raised at Second Reading the issue that there are enablers whose approach to reporting suspicions is light-touch or simply to turn a blind eye. I also advocated the idea put forward very eloquently by my noble friend Lord Vaux a few moments ago of having a named senior official on the hook. Simply saying that existing regulations cover this is to deny the evidence that there are entities and enablers in the area addressed by this Bill that have been skirting round existing regulations too easily by claiming ignorance or that suspicion was only mild. I think this may be more specifically reflected in the reference in paragraph 5 on page 5 of the Minister’s letter of 11 March, which says in relation to verification of information that:

“We expect that this will include a role for professionals regulated in the UK by the Money Laundering Regulations.”

This amendment, by including suspicion rather than certain knowledge, covers the loophole by which enablers can claim not to have had certain knowledge even if they should have had reasonable suspicion. This makes it considerably more difficult for enablers and others to look the other way and strengthens the hand of those seeking to hold them better to account. I support this amendment.

Photo of Lord Clement-Jones Lord Clement-Jones Liberal Democrat Lords Spokesperson (Digital)

My Lords, I shall speak to Amendment 53. I thank the noble Lords, Lord Cromwell and Lord Vaux, for their support, although I understand that they would like to see this tweaked to go further. I also thank the noble Lord, Lord Eatwell, for his supportive comments.

The Bill needs to be comprehensively amended to close the loopholes that currently allow professional enablers to undermine the effectiveness of, and even circumvent, the checks aimed at detecting, disrupting and deterring economic crime. One of the key ways this can be done is by imposing a positive duty on professional enablers to disclose knowledge or reasonable suspicion that misleading, false or deceptive information has been provided to the registrar of overseas entities.

As I set out on Second Reading, professional enablers, such as lawyers, accountants and bankers, are the gatekeepers of economic crime and the Government need to adopt a comprehensive strategy towards them. Given the nature of their work, there is an inherently high risk that these professionals may unwittingly enable economic crime, but there are also enablers that specialise in services aimed at concealing the source of wealth or ownership so as to frustrate the objectives of the law.

This poses a particularly acute challenge in the context of the Bill’s attempt to tighten the checks around the beneficial ownership of property by overseas entities. The UK’s 2017 national risk assessment of money laundering and terrorist financing revealed that 50% of suspicious activity reports related to the legal sector in 2016 were linked to the property market, illustrating that real estate transactions are especially susceptible to money laundering.

As the noble Lord, Lord Vaux, very eloquently deconstructed, the Minister prayed in aid regulation by the Solicitors Regulation Authority and the Institute of Chartered Accountants in England and Wales on Second Reading. Does the Minister really believe that these regulators are the way to tackle these professional enablers? The current model for supervising professional enablers is fragmented and weak. In the legal and accountancy sectors alone, there are 22 different professional body supervisors, or PBSs. In its 2021 report, the Office for Professional Body Anti-Money Laundering Supervision found that the vast majority—some 81%—of these legal and accounting PBSs do not implement an effective risk-based approach to supervising their members as required by the money laundering regulations. Where is the evidence that they can do the kind of job needed to root out corrupt behaviour in sanctions avoidance or as envisaged by this Bill?

In summary, it is critical that the Bill addresses the heightened risk that professional enablers, particularly conveyancers and lawyers, will frustrate the objectives of the register of overseas entities. Beyond this modest amendment, urgent reform is needed—I hope it will take place in the second Bill—to ensure that there is effective, comprehensive supervision of professional enablers. This should be fully addressed when we come to the second economic crime Bill.

Photo of Lord Rooker Lord Rooker Labour

My Lords, I had not intended to speak today. I came to learn and listen to the experts on areas I do not know much about. But listening to the noble Lords, Lord Cromwell and Lord Clement-Jones, I am reminded of an example. I know this would not be classed as money laundering, but the well-known spiv, Aaron Banks, was responsible for what is, I think, the biggest political donation in British history—I think it was £8 million—during the Brexit referendum period. When it came to investigation by the Electoral Commission, which had the responsibility for doing this, he was not an unwitting enabler. His conclusion was, “We’re cleverer than the regulator.” The Minister does not want to be faced with that during the passage of this Bill and its actions, so he would be very wise to accept the spirit of some of these amendments.

Photo of Baroness Jones of Moulsecoomb Baroness Jones of Moulsecoomb Green

I think it is obvious that the Minister will accept a lot of these amendments, because they are from people who are much cleverer than most of us in this Chamber.

I support most of the amendments—even all the government amendments, because they are quite helpful, particularly those that require the disclosure of whether any beneficial owners of property are subject to sanctions, and the strengthening of the criminal offences for false declarations. However, it is obvious from the speeches of other noble Lords that the Government are still falling short and that the Bill needs to be tougher. For example, Amendments 23, 24, 57 and 58 all need to be inserted into the Bill.

All beneficial interests should be registered, not just those acquired on or after 1 January 1999. That is a completely arbitrary date and should be removed. The Minister shakes his head; I guess he will argue that it is a very important date. I disagree.

This legislation is being rushed through as an emergency, but the Government are content to wait another year, following initial registration, before any changes in beneficial ownership take place. I cannot see the logic in that and I think most people will not either. It makes much more sense to update the register within 14 days of any changes.

Photo of Lord Fox Lord Fox Liberal Democrat Lords Spokesperson (Business, Energy and Industrial Strategy) 5:30 pm, 14th March 2022

My Lords, this is the first time I have spoken today. I will make a couple of points from the Front Bench that reflect on the other groups as we debate them.

We on these Benches share the hopes of the Government and, indeed, Her Majesty’s loyal Opposition to get this Bill on to the statute book as quickly as we can. For that to happen, the Government seem to be moving on a number of issues, which will be helpful. For our part, we have had to suspend the level of scrutiny that this Bill would normally attract. That has been difficult for us because, as we heard at Second Reading and have already heard in debate on the first group, much could be done to improve and extend the Bill.

As such, and as we have already heard from the noble Lords, Lord Vaux, Lord Cromwell, Lord Cormack and Lord Empey, there are a number of solid assurances that the Minister can give us—he hinted without necessarily assuring in his response to the previous group. We would appreciate an undertaking from the Minister that, when we return to this topic on the second part of this Bill, or ECB 2 as we now have to know it, there will be a frank assessment from the Government as to the operations of ECB 1, and a chance to debate and modify ECB 1 in the light of that frank assessment.

Further, the four planned elements of ECB 2 were set out by the noble Baroness, Lady Williams, at Second Reading. They indicate a fairly narrow—indeed, dangerously narrow—focus for that Bill. A commitment from the Government that they will enable that Bill to be broadened, and that some of the issues we have already heard and some more that we will hear later will be added to the curriculum of that Bill, will be very important.

This is a large group of amendments; noble Lords will be pleased to know that I will not take them one by one and summarise them all. There are a number of amendments from the Government, which we welcome, but I will briefly highlight Amendment 24 in the names of the noble Lord, Lord Vaux and Lord Cromwell. We have heard from them so I will not reiterate their speeches. We believe that this important issue is possible and do not see why it is not something the Government could easily incorporate in the current form of the Bill.

I will primarily speak on my noble friend Lord Clement-Jones’s Amendment 53, to which the noble Baroness, Lady Chapman, and I have added our names. We have heard today and at Second Reading that this is the issue that hits at the heart of the problem we face, and the scale of the infiltration of stolen wealth that has come into the United Kingdom. It is why the kleptocrats have been so comfortable here: they have been feather-bedded by a welcoming committee of enablers, anxious to claim new clients and get some of the money. For some so-called enablers—indeed, most of them—that temptation was outweighed by their moral and practical concerns. We should note that clearly. Unfortunately, for others, such as the sorts that the noble Lord, Lord Vaux, identified, the temptation has been too great. A significant minority of practitioners have taken the “ask no questions and tell me no lies” philosophy to doing business.

This amendment would really do no more than reinforce what should be happening already, but it restates it in a different way. Within each of these enabler services, there needs to be a senior partner or director who signs off on the due diligence and is accountable to the law for doing so.

In closing, I note a briefing from the Law Society that arrived in my inbox this morning. It expressed concern about this amendment. The pressure group said that the amendment appears to extend a duty of due diligence to all stages of client take-on and transactional/advisory work. Its concern was that it would

“create a significant burden on professional services such as law firms that would be difficult for them to meet”.

In other words, this due diligence would be too hard to do. That tells us that there is work to be done in this area.

Photo of Lord Coaker Lord Coaker Shadow Spokesperson (Defence), Shadow Spokesperson (Home Affairs), Opposition Whip (Lords)

My Lords, this is yet another group of amendments with contributions from across the Chamber that signifies some of the problems we have in fast-tracking this part of the Bill. Many noble Lords, including my noble friend Lord Sikka, have put forward sensible amendments that would improve the Bill, but we cannot accept them because we are in a rush to get it through. They are common-sense amendments. I take very much the point that the noble Lord, Lord Empey, made: if we are not careful we will have a situation where we pass the Bill and, in a week or a couple of months’ time, there will be an oligarch, a kleptocrat or whatever you want to call them—somebody living off dirty money—on the front pages of the papers parading themselves as having got round what the Government have only just passed.

Of course, that is the whole purpose of the amendments that so many noble Lords have put forward: to say to the Government that they have to address some of this. If they cannot address it in this Bill, which clearly they will not be able to do because it is emergency legislation—we all accept the crisis in front of us—let us have a cast-iron guarantee that the second economic crime Bill will come quickly to address these various issues and that we will be able to come back to them. Those are the reassurances that so many of us are looking for from the Government. I do not think that is too much to ask.

As my noble friend Lord Rooker pointed out, with his normal passionate use of the English language, we do not want a situation where people—I cannot remember who he referred to—parade around saying, “Look, we’re cleverer than the regulator.” That undermines democracy and Parliament. It undermines all of us. That is how serious it is when people flaunt their ability to circumvent the law. That is not in our interest, whatever the crisis we face. I know that the Minister would accept that.

I am grateful to all noble Lords who have tabled amendments in this group, which cover a variety of non-trust provisions relating to the register of overseas entities. I should give my noble friend Lady Chapman’s apologies. She cannot participate in proceedings for personal reasons, but she tabled Amendment 23, which, like Amendment 24 in the name of the noble Lord, Lord Vaux, seeks to accelerate the reporting of changes in beneficial ownership, for reasons ably supported by my noble friend Lord Eatwell. Again, this seems absolutely common sense; it does not seem to be a point of argument.

The Government are keen to stress that the vast majority of entities that apply to join the register will be entirely above board. We accept much of that. However, under the current provisions, a shell company could be registered under certain ownership on day 1, with new appointments to the board made on days 2 and 3, but it would be required to report that only 12 months later. That is clearly not acceptable or sensible. As my noble friends Lord Sikka and Lord Eatwell, the noble Lord, Lord Vaux, and others said, something should be done about that. The Government should see what changes they can make.

There are legitimate questions about enforcement, but do the Government agree that there should be a general principle that entities need to be proactive in reporting changes? The Minister should accept Amendment 23, or indeed Amendment 24, but if not, he should commit to giving this further thought as the Government begin to draft the next piece of legislation.

We are also sympathetic to other amendments in the group, including Amendment 3 from the noble Lord, Lord Agnew, and Amendment 53 from the noble Lord, Lord Clement-Jones, supported by my noble friend Lady Chapman and the noble Lord, Lord Fox, which tries to start to deal with enablers. On so-called enablers, it would be helpful to understand what steps, if any, the Government have taken since Russia invaded Ukraine. As this is an emergency piece of legislation, what emergency action have the Government taken with respect to enablers? There have long been stories of lawyers and estate agents who purposely avoid asking their clients probing questions because they know that the answers would preclude them from doing business with them. It is time to say, “Enough is enough and we will seek you out and do something about it.”

We know that some individuals have sought to urgently offload their UK-based interests and, if they are seeking to rush sales through, we would hope that estate agents and others were already querying the reasons for that. In addition to any steps that might have already been taken, what steps do the Government plan to take over the coming days and weeks to deal with that problem? This series of amendments asks various questions, but ultimately seeks to tighten up a Bill that is in all our interests.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

First, I thank all noble Lords who have contributed to this debate. Before I address the amendments tabled, I reiterate the point I made earlier. This will be almost the first register of its kind in the world. We should accept that we are leading on this. I completely accept that we may not have everything perfect, but we will learn as we go—just as we did, in the example I cited, when we implemented the people with significant control requirements for domestic companies. We had to learn and iterate that, and now many other countries have followed our lead. That is a good thing. I re-emphasise that we will be perfectly willing to revisit these measures if it transpires that we have not got everything quite right.

Photo of Lord Eatwell Lord Eatwell Labour

Just thinking off the top of my head, I can think of four registers of this ilk which exist already.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

I would be happy to debate with the noble Lord. When I queried this, my information was that Germany potentially has something similar, but nobody else. I am happy to exchange letters with him about numbers, but that is not the information I have.

Before I move on, perhaps I may correct something I said on the first grouping—which will teach me to pluck numbers from memory rather than consulting my notes. The correct figure is that there are 30,000 overseas entities registered in the UK owning approximately 95,000 properties. I think I may have said that the other way round. I slightly disagree with the noble Lord, Lord Sikka. The vast majority of those are perfectly legitimate entities. We are an open trading environment and welcome investment from all over the world. International companies owning headquarters in the UK do so perfectly legitimately. The vast majority of these entities are legitimate. A small minority are not, and they are the ones we seek to catch in this register, but we must be fair to the vast majority which are perfectly legal, above board and just seeking to use the UK to do business, which we encourage.

Let me also pick up the points made by the noble Baroness, Lady Jones. Although I am grateful that she is supporting the government amendments—I will write that down for posterity, because I am not sure it will happen again—we did not just pluck the dates of 1999 for England and Wales and 2014 for Scotland out of thin air. We did not just sit there and think what date we would make it retrospective to. Those were the dates of incorporation when that was required by the Land Registry, so it is appropriate to go back to them. Northern Ireland has never required this, so it is impossible to retrospectively apply the provisions there. I hope she will accept that we did not just make these dates up; they are put in place for a reason.

Moving on to the amendments, let me start with those tabled by my noble friend Lord Agnew and the noble Lord, Lord Sikka. These amendments broadly deal with additions to the required information that needs to be provided at the point of application in respect of beneficial owners and managing officers.

Amendment 3 in the name of my noble friend Lord Agnew would add to Clause 4 a provision to enable the registrar, on an application for registration, to request further information to be provided in a timely manner where there appear to be material omissions or suspected false statements. This amendment also provides that an application may not be accepted unless the registrar is satisfied that any request for further information has been adequately addressed. Amendments 5 and 13 would provide that registrable beneficial owners and managing officers also have to provide any former names. Amendments 8, 12 and 14 relate to information that should be provided by managing officers on sanctions that apply or any criminal convictions that are held.

Although I understand the motives for these amendments, it is fair to point out that a rigorous amount of information is already required for application, as outlined in Schedule 1. The register of overseas entities is itself designed to increase transparency. The information required on beneficial owners is closely based on the existing requirements for information required on people with significant control in the UK company regime.

Again, it is worth remembering that the majority of entities registering will be legitimate, and we have to balance the burden of this reporting for them with the benefits that the Bill will deliver. That is a balance that we have sought to strike throughout the development of the register.

Photo of Lord Sikka Lord Sikka Labour 5:45 pm, 14th March 2022

I refer the Minister to an entity called Business Bank Italy Ltd. It was owned by a convicted Mafia person from Italy, who registered this bank here and it had a website inviting wealth management. At Companies House, there was absolutely no declaration of any criminal convictions. Previously, the same person registered as secretary and director of another company, where the same person provided information in Italian. When it was translated into English, it read, “My name is the Chicken Thief, my occupation is a fraudster”, and the address was “Street of 40 Thieves, town of Ali Baba in Italy.” There is no information on whether there was any criminal conviction or anything else. The Minister just said that there are robust checks at Companies House. Where are these robust checks? I could pick out that example. Companies House did not carry any out; neither did any government department. As he knows, I have been filing a lot of Written Questions of late drawing Ministers’ attention to all kinds of strange goings-on in companies. It seems to me that, by rejecting the idea that somebody has to provide their former names and a record of criminal convictions and sanctions, the Government are opening the door for these people to misbehave.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

We are not opening the door. I assume that the companies the noble Lord is referring to are existing UK-registered companies; I know he has asked me a number of Written Questions about companies registered on the UK database, and I totally accept his point. He is pointing out an issue we are well aware of: that the existing UK companies register is a dumb register. The registrar is obliged under existing law to accept the information tabled to her. The noble Lord has raised a number of examples and tabled Written Questions to me about some patently ridiculous information that has been supplied. I get regular correspondence from noble Lords and from constituency Members of Parliament where false information is given and false companies registered at people’s addresses, unknown to them, and they then receive correspondence.

The difficulty at the moment is that the registrar does not have the legal power to query the information registered to her. If the noble Lord will be patient and wait for economic crime Bill part 2, which is coming, he will find that it will deal with this precise point. It will give the registrar the ability to query that information and provide that people must give identity details, passport information, et cetera, when they register. This is a massive change to the operation of Companies House—the biggest change for something like 170 years to the register database. It will give the registrar the power to query that information and people will have to provide evidence of their identity, addresses, et cetera. The noble Lord is right—there are a number of ridiculous examples—but we will deal with that. I am aware of it, and it will be in the next Bill.

In addition, information regarding designated persons who are listed on the UK sanctions list is already published for free via GOV.UK by colleagues in the Office of Financial Sanctions Implementation.

Finally, the verification mechanisms of the register, which will be provided for under Clause 16, will ensure as far as possible that the information provided is highly accurate. This register will provide vital information and in turn give enforcement agencies even greater information to take actions and carry out their own investigations. Therefore, on balance and taking into account the reasoning we have set out, we are unable to accept these amendments.

However, I am in agreement with the noble Lord on the particular importance of ensuring that there is clear information for users of the register about whether individuals identified as beneficial owners of the overseas entities are subject to UK sanctions. It is in the public interest for users of the register of overseas entities to be able easily to see whether a registrable beneficial owner is a designated person listed on the UK sanctions list.

The Government have therefore tabled their own Amendments 7, 9 and 11, which would mean that the required information about a registrable beneficial owner will include information about whether they are designated by virtue of the Sanctions and Anti-Money Laundering Act 2018. These three amendments would require overseas entities to confirm whether any of their registrable beneficial owners are designated persons listed on the UK sanctions list. It would be an offence not to do so. This information would be displayed publicly on the register. This will ensure that this information is then more easily accessible to the average user of the register. That fulfils a requirement raised by a number of noble Lords, and by Members of the other place when they debated this legislation. I hope that the noble Lord, Lord Sikka, will appreciate that these three amendments will deliver a good deal, if perhaps not all, of the intention of his amendments and those proposed in the other place.

I move on to Amendments 18, 19 and 20, also tabled by the noble Lord, Lord Sikka, which relate to the level of shareholding that would define a “beneficial owner”. His amendments seek to remove the 25% level altogether, to capture any person who holds any shares in the overseas entity in scope.

The 25% threshold contained in the Bill is in line with global norms with regards to beneficial ownership. The Financial Action Task Force, which sets global anti-money laundering and counterterrorist financing standards, has found that this threshold is acceptable as an example of how to determine beneficial ownership. As a result, 25%—or more than 25%—is used in many jurisdictions, such as in the US and in the European Union’s recent anti-money laundering directives. The 25% threshold also follows the UK’s PSC—person with significant control—regime, which similarly requires beneficial ownership information of UK-registered companies. When the PSC regime was in development—

Photo of Lord Burnett Lord Burnett Liberal Democrat

Does the 25% limit cater for class rights in the definition of control? In other words, you can have 10% and 90% but the 10% have all the voting rights.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

I think it refers to rights of control—the actual percentage shareholding of the company—but if I am incorrect on that, I will certainly write to the noble Lord.

When the PSC regime was in development, significant analysis, including consultation, considered the question of thresholds. The threshold of more than 25% reflects the level of control a person needs in voting rights, under UK company law, to be able to block special resolutions of a company. It was considered that 25% represented the optimum opportunity to understand who is in a position to exert significant influence and control over a company. Collecting information on legal ownership below that threshold would be much less likely to do this. Removing the threshold altogether would have the effect of essentially creating a register of shareholders rather than a register of beneficial ownership, which—I hope noble Lords will agree—is not appropriate for the purposes of the Bill and the transparency involved in this register. Maybe the noble Lord, Lord Sikka, likes going through thousands of register entries, but I am not sure it would be helpful to most people.

For entirely legitimate entities, there could be hundreds or thousands of shareholders. For instance, think of a large foreign company that owns property in the UK. I am really not sure whether it would be tremendously helpful to have literally thousands of individual shareholders on the list of a property’s beneficial owners. For example, in the case of public limited companies with highly dispersed ownership, where shares can be bought and sold frequently and instantly, removing the 25% threshold would make the requirements of the register disproportionately difficult to comply with, as entities must first send a notice to those that they believe are their beneficial owners, and then allow time for potential beneficial owners to respond.

We are mindful of the risk that an individual wishing to disguise their beneficial ownership might, for example, deliberately reduce their shareholding. We have considered this, and so have made provision that means that anyone, regardless of their shareholding or voting rights, who exerts or has the right to exert significant influence or control over an entity is captured within the meaning of “beneficial owner”. This includes anyone who holds the right to appoint or remove a majority of the board’s directors. Perhaps that takes account of the point the noble Lord made earlier.

I am sorry that the noble Baroness, Lady Chapman, cannot be with us today. I thank her and other noble Lords for Amendments 23 and 24. In particular, I thank the noble Lord, Lord Vaux, for his engagement and for the points he has made. I am very happy to meet the noble Lord to discuss these matters further.

These amendments would require overseas entities to update the register not just annually but when there has been a change in beneficial ownership. I know this matter has been exercising a number of noble Lords. It was also raised in 2018, during pre-legislative scrutiny of the then draft registration of overseas entities Bill. At the time, the scrutiny committee accepted fully in its report that this requirement would be difficult to enforce without active investigation. This would also create great uncertainty for third parties transacting with the overseas entities. This is the key reason why we have adopted the 12-month threshold.

A change in beneficial ownership is not necessarily foreseeable and would not be knowable to any third parties, including Companies House, without detailed investigation. As I said, there are about 30,000 of these overseas entities. As such, a requirement for an overseas entity to update its information when there is such a change means that, at any point in time, it could be compliant one moment and then not compliant the next. Our problem is that we think this creates significant legal uncertainty for any third parties engaging with the entity and seeking to purchase the property from it.

Photo of Lord Cromwell Lord Cromwell Crossbench

Can the Minister help me and explain why they would be non-compliant if they had two weeks within which to register it? As long as they did it within two weeks, they would be fine.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

Yes, but they would have to be tabling notices to any potential beneficial owners in order to update the register. We think that if we have a yearly update, any third party transacting with that entity would then have sufficient legal certainty to be able to proceed. The point is not that the entity might not register the change of ownership but that the third party, and indeed Companies House, have no way of knowing whether it has. Therefore, a third party could engage in a transaction thinking that the original entity is compliant and then discover afterwards that it has not updated its register and is non-compliant, and therefore potentially lose its money and be unable to proceed with the transaction because it cannot register the property. On balance, we think the better option is to have a yearly update cycle, but I realise that this is a point of debate and I am happy to discuss it further. I know that the noble Lord, Lord Vaux, is engaged in this.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords)

The Minister has not addressed the point that this can easily be dealt with by bringing forward the annual update, which a company has the ability to do under—I think, from memory—Clause 7. If that were done as part of the property transaction, that solves the problem completely. Does the Minister disagree with that?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

No, I do not disagree with that. It is, of course, perfectly possible—

Photo of Lord Eatwell Lord Eatwell Labour

My Lords, on the same point, would it not be helpful for a third party to know who it is actually dealing with? Under the Minister’s proposal for 12 months, it could rely on the register and find out that it is dealing with someone it had not expected at all.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy) 6:00 pm, 14th March 2022

Indeed it would be helpful, and that is why we have the transparency of the register in the first place. Returning to the point made by the noble Lord, Lord Vaux, it would indeed be possible for them to update it, and it is of course perfectly possible that the advisers of the third party buying that property would wish to say to the entity that they wanted it to update the register in terms of formal ownership before they could advise their clients to proceed with the transaction, which is a point that the noble Lord made to me. That is different in terms of due diligence of the third party’s financial legal advisers, but in terms of the legal requirements, we think that it is best to leave it at 12 months. However, maybe we could have further discussions on this before we get to the second Bill.

To summarise, a change in beneficial ownership is not necessarily foreseeable and would not be knowable to any third parties, including Companies House, without detailed investigation. As such, a requirement for an overseas entity to update its information when there is such a change means that it could be compliant one moment and non-compliant the next, at any point in time. Our point is that this would create significant legal uncertainty for any third parties engaged with the entity.

I remind noble Lords that the key sanction for non-compliance with the new register—apart from the criminal penalties for non-compliance—which interferes with existing property rights is effectively to make it impossible for the buyer to then register title, if purchasing from a non-compliant entity. Of course, if they have transacted with an overseas company in a different jurisdiction, it might be very difficult for them to then take appropriate legal action to recover any sums that they have paid. This is not about providing a free “get out of jail” card for the overseas entity; it is genuinely about protecting the rights of third parties that wish to transact with them.

As the noble Lord, Lord Vaux, pointed out, the onus is on the buyer and their agents to ensure that they do not transact with a non-compliant entity. In order to protect the buyer, who is likely to be an innocent third party, it follows that there must be absolute legal certainty in every case as to whether the overseas entity doing the selling is compliant. An annual update with a transparent end date for the update period will give third parties transacting with the overseas entity the certainty that they need. The annual update already requires an overseas entity—

Photo of Lord Cromwell Lord Cromwell Crossbench

I do not wish to be argumentative with the Minister—well, perhaps I do—but can he confirm in respect of the third party buying the company that that company will be compliant even if, say, 11.5 months ago, they changed their ownership because they will not have had to register?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

Yes, that provides the required legal certainty to the third party that is buying it, at the expense of, perhaps, a certain amount of transparency for that 11.5-month period. So, yes, I accept that.

The annual update already requires an overseas entity to provide information about its current beneficial owners, as well as any changes since its last update. This latter information was added as a result of the pre-legislative scrutiny of the Bill, providing a complete picture of an overseas entity’s beneficial owners. For these reasons we do not believe a change in the updating period is necessary or desirable, and I therefore encourage noble Lords not to press their amendments.

Turning to government Amendments 49, 50, 51 and 52, the Government have listened to the concerns raised about the need to deal effectively with anyone seeking to file false or misleading information or those who know or suspect that they may be filing false information, and we have taken on board those concerns. I thank all noble Lords who raised these concerns with me. They made the point that the evidential threshold to prove intent or recklessness is too high in the clauses as drafted. I have therefore tabled these government amendments to ensure that those who provide false or misleading information “without reasonable excuse”—in other words, a lower legal barrier—can be prosecuted and are subject on conviction to an unlimited fine. This will catch those who seek to facilitate and enable money launderers and the corrupt.

Furthermore, we have amended the threshold for what, under our amendments, constitutes an aggravated offence. This removes the reference to the word “recklessly”, which caused a lot of concern in the other place and to the noble Lord, Lord Fox, and others in this place. It also retains the potential for imprisonment and an unlimited fine if convicted of the aggravated offence of knowingly filing false, misleading or deceptive information. I hope this addresses the concerns.

I thank the noble Lord, Lord Clement-Jones, for Amendment 53, which would create a criminal offence of failing to disclose to the registrar certain information when a professional knows or suspects, or has reasonable grounds for knowing or suspecting, that misleading, false, or otherwise deceptive information was provided to them in their professional capacity. Again, I understand the noble Lord’s motive for proposing this new clause, but I hope that he will agree that his aims can be met by the existing provisions in the legislation regarding offences for the provision of false information, as developed in the way I have just set out by the Government’s amendments to lower the threshold needed for prosecution. We are confident that this will ensure that enforcement agencies have sufficient capacity to tackle those who seek to subvert the integrity of the register through the provision of misleading information.

I also take this opportunity to reassure the noble Lord—

Photo of Lord Clement-Jones Lord Clement-Jones Liberal Democrat Lords Spokesperson (Digital)

My Lords, I am afraid I do not agree with the Minister; I am amazed that he thought that I would. The Government need a strategy to catch these enablers in the way that they currently operate. What strategy do the Government have? The Minister was just about to pass on to other things. He has prayed in aid the professional regulators, such as the SRA and the ICAEW, and he has more or less said that the legislation is absolutely fine: it will catch the enablers properly. But does the Government not need a proper strategy for dealing with enablers? They cannot gloss this over. Is the Minister prepared to look at this carefully before the next Bill?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

Of course, we are constantly looking at these matters. The Treasury is implicitly engaged in pursuing crackdowns on the so-called enablers that the noble Lord has mentioned, and the anti-money laundering regulations exist. This register, which is a transparency measure, is designed to provide information to the public, HMRC and other law enforcement agencies that can then take the appropriate action under the other provisions. However—before the noble Lord, Lord Fox, gets up—I totally agree with the noble Lord that we need to look again at whether the anti-money laundering statutes are appropriate. It is not for this legislation, but I am sure it is something we will want to look at in detail before we get to the next Bill, because it is a complicated area of law. If we do not, I am sure the noble Lord will wish to table his amendments again then.

Photo of Lord Fox Lord Fox Liberal Democrat Lords Spokesperson (Business, Energy and Industrial Strategy)

Each time the Minister speaks on this, I do not hear him acknowledge that there is a problem. In order for there to be a solution, there has to be an acknowledgement that there is a problem. So, does the Minister agree with me that there is a problem with unscrupulous enablers currently operating in the City and the United Kingdom? Unless the Minister agrees, I do not think that we can have much hope of a solution.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

I am happy to agree with the noble Lord. If there is one firm of accountants or one legal practice that is turning a blind eye to these provisions, there is a problem with which we need to deal. Nobody wants to see that; we want to give the UK a reputation as the best place in the world to do business and to crack down on the small minority of the legal profession that are abusing their position and facilities—of course we would want to do that.

Photo of Lord Clement-Jones Lord Clement-Jones Liberal Democrat Lords Spokesperson (Digital)

My Lords, I am sorry to interrupt the Minister and slow the proceedings but, on that point, the Minister began to move, gradually, towards thinking about the enablers, and mentioned anti-money laundering legislation. But it is wider than that: it is about sanctions, economic crime in general and the provisions of this Bill. Is the Minister prepared to undertake to look more broadly across the piece?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

Yes. Obviously, a number of different government departments would be involved in doing this, but a number have been involved in putting the provisions into this Bill, and a number will be involved in the provisions of the next economic crime Bill. Of course, we want to take action against lawyers and accountants who abuse their positions to benefit some of these oligarchs and others. We have all seen the press reports and we all know the people that we are concerned about. I would not seek to defend them in the slightest, and I hope that we will be able to put the appropriate sanctions in place to deal with them.

Photo of Lord Cormack Lord Cormack Conservative

Does my noble friend think it would be a good idea to set up a Committee of your Lordships’ House immediately after the Bill has gone on to the statute book, like these special Select Committees that are set up for specific purposes, so that you have a number of knowledgeable Members of your Lordships’ House, among whom I do not include myself, who will be able to provide expert examination of this Bill on a continuous basis?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

The noble Lord often suggests setting up special Committees of this House. He will know that it is way above my pay grade to dictate to the House authorities what committees they wish to set up for examining particular Bills. I know from appearances that there are some extremely good and effective committees already in this House examining all parts of the Government’s legislative agenda and all departments—but, if the noble Lord can forgive me, I will not get into instructing the House authorities on what committees to set up to future scrutinise our work.

Relevant firms, including financial institutions, law firms, accountancy firms and estate agents, under the anti-money laundering framework, must inform Her Majesty’s Treasury as soon as practicable if they know, or have reasonable cause to suspect while carrying out their business, that they have encountered a person subject to financial sanctions, or a person who has committed a financial sanctions offence. They must state the information on which the knowledge or suspicion is based, and any information they hold about the person by which they can be identified. It is already an offence to fail to comply with this reporting obligation. I understand that the noble Lord does not think that the legislation is applied properly—perhaps we can look at that—but there is already an offence on the statute book.

Activity which seeks to evade these new beneficial ownership reporting obligations should be taken into account in the course of these firms taking a risk-based approach to anti-money laundering, and any suspicions of sanctions evasion should be reported in accordance with their legal obligations. I am pleased to say that Treasury Ministers will be writing to the anti-money-laundering supervisors of the relevant professional enablers on this matter, highlighting that the Government will be expecting everyone in these sectors to be particularly vigilant.

I hope that, with the reassurances that I have provided on this important issue, the noble Lord will feel able to withdraw his amendment.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords)

The Minister was kind enough to offer to meet with me about my Amendment 24. I actually asked about meeting regarding the verification regulations in Clause 16. Is he prepared to do that, probably with others, as it is very important that these regulations get the input of all these highly intelligent people around the Committee before they are issues, rather than afterwards?

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

Yes, I am happy to meet with the noble Lord and his colleagues to discuss that matter.

Photo of Lord Agnew of Oulton Lord Agnew of Oulton Conservative

I beg leave to withdraw the amendment.

Amendment 3 withdrawn.

Clause 4 agreed.

Schedule 1: Applications: required information

Amendment 4 not moved.

Amendments 5 to 16 not moved.

Schedule 1 agreed.

Schedule 2: Registrable beneficial owners

Amendments 17 to 20 not moved.

Schedule 2 agreed.

Clauses 5 and 6 agreed.

Clause 7: Updating duty

Amendments 21 to 27 not moved.

Clause 7 agreed.

Clause 8 agreed.

Clause 9: Application for removal

Amendments 28 to 32 not moved.

Photo of Baroness McIntosh of Hudnall Baroness McIntosh of Hudnall Deputy Chairman of Committees, Deputy Speaker (Lords) 6:15 pm, 14th March 2022

I advise the Committee that if Amendment 33 is agreed to, I cannot call Amendment 34 by reason of pre-emption.