The new Register of Overseas Entities presents solicitors with the opportunity to develop a practice as verification agents for new and existing clients. On paper, the work itself may not (necessarily) be difficult, particularly for those steeped in the Money Laundering Regulations compliance. Although there will be cases where verifying the beneficial ownership of overseas entities will be a formidable task. Complex structures in opaque jurisdictions will pose particular challenges.
Anecdotal evidence suggests that many law firms are reluctant to take on the work, put off by the perceived risk and short deadlines. These risks are highlighted in The Law Society’s guidance for solicitors and include potential criminal liability.
However, for those who are prepared to accept and carefully manage these risks, there are attractive possibilities to win new work and add value to existing clients.
What is the Register of Overseas Entities?
As part of the government’s expedited crackdown on all things financial crime, largely in response to the Russia-Ukraine war, the ownership of UK property by foreign companies and trusts is about to become much more transparent. The logic is that it has historically been far too easy for individuals to hide behind the veil of corporate structures and trusts, allowing ‘undesirables’ to freely profit from the UK property market.
Under the Economic Crime (Transparency and Enforcement) Act 2022, these foreign entities need to register with Companies House and identify and verify their beneficial owners. Without a valid registration they will be unable to buy or sell UK property. There are heavy penalties for those who fail to register by 31 January 2023.
Verification is a key part of the process
So that the Companies House records can be relied upon, the beneficial owners identified by overseas entities need to be verified by a ‘relevant person’. This will be a professional who is themself regulated for the purposes of the Money Laundering Regulations. Solicitors fall into this category.
It is relatively easy to get a Companies House ‘assurance code’ to act as a verification agent.
The verification duties can be found in Regulation 6-8 of The Register of Overseas Entities (Verification and Provision of Information) Regulations 2022. In summary, verification agents must:
- Establish who is a beneficial owner of the overseas entity (i.e. who will require registration and verification?). That will involve understanding the legal structure.
- Analyse the nature and extent of the beneficial owners’ interest in the overseas entity.
- Verify the beneficial owners’ identity.
- Make a verification submission to Companies House.
A solicitor may make the full registration at Companies House, or leave that element to the overseas entity.
This presents obvious commercial opportunities for lawyers. Foreign owners going through the registration process have an immediate need for advice and verification. And this assistance may be needed on a repeat basis, given that there are annual reporting and update requirements.
Verification is not necessarily a one-time process. There will be occasions when the Companies House register will need to be updated and the verification process will need to be rerun.
What are the risks for solicitors acting as verification agents?
Despite the commercial opportunities, this is not an area of work to be taken on lightly. Some of the core risks for solicitors include:
- Lack of understanding or competence in the register of overseas entities process, and/or applicable legal skills to unpick corporate and trust structures in overseas jurisdictions. Specialist overseas counsel may be required.
- Acting under the mistaken assumption that verification is the same as identity verification under the Money Laundering Regulations. It is not. For instance, the definitions of ‘beneficial owners’ differ. And as things stand, verification is not conducted under the ‘risk based approach’ we are all familiar with.
- Receiving documents from the overseas client in foreign languages and in unfamiliar formats. Notarised translations may be required.
- Missing a deadline to submit Companies House applications, where this is a part of the retainer, could result in a negligence claim.
- Caving to intense pressure from overseas clients to complete verification without the required independent and reliable information. The stakes are high for those requiring registration, potentially curtailing their UK property investments and presenting criminal liability. Solicitors will need to be able to robustly resist pressure.
Solicitors undertaking verification without the required skills and expertise are likely to be in breach of the SRA Code of Conduct. The regulator has already hinted that ‘there may be issues’ for law firms acting as verification agents, and would be well advised to heed the caution contained in The Law Society guidance.
Professional indemnity insurance cover may also be an issue, and firms need to check that acting as a verification in this new and potentially risky area is covered.
In the worst case scenario, there is criminal liability for verification agents who misrepresent the beneficial ownership of an overseas entity to Companies House.
How to control the risks
As with all things to do with risk management the first thing you need to do is acknowledge that there is a risk to be addressed. Tick.
The second thing is to conduct some form of risk assessment i.e. what does the risk look like, how serious does it look and therefore what steps need to be taken to mitigate the risks?
That process will dictate how the business responds. Does the top level and compliance function of the business agree that this is a risk worth taking? If yes, what controls can be put into place?
A typical control framework for law firm verification agents might look something like this:
- All register of overseas entities verification matters to be subject to Director and/or COLP approval
- A ‘rule of thumb’ that the client should be known to the lawyer for a period of time e.g. 3 years (this obviously won’t work if you are planning to take on new clients for this type of matter)
- All lawyers acting as verification agents can only do so after receiving training
- Instructions can only be taken if the firm has the requisite technical and legal competence
- All retainers must properly scope out the verification work – are there limits on what the firm will and will not do?
- A strict policy on the extent to which third parties can be relied upon
- A guide to best practice
- Monitoring systems to be put in place, both at the granular file level and overview of verification instructions
- A policy in place setting out these requirements – spelling out the consequences are for not following it
Need a verification agent?
If you or your client needs a verification agent, but your firm is not keen on taking the work, please let us know and we will connect you with a safe pair of hands.