Last year I wrote about whether it is too risky for solicitors to act as verification agents. I decided to find out first hand what the risk implications are, by signing up as a verification agent.
Some solicitors and law firms have agonised over whether to provide verification as a service to their offshore clients. The demand is certainly there.
Here is what I learned and observed about the process.
What is a register of overseas entities verification agent?
You have probably read about the new register of overseas entities, brought in under the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA).
The aim of ECTEA is to improve the transparency of ownership of UK property. It had been in the pipeline for a number of years, but was finally rushed onto the statute books in the wake of the invasion of Ukraine and the resulting economic pressure on Russia.
It does not just target Russians, however. The UK property market, particularly prime London real estate, has long been a favourite of secretive overseas investors of all nationalities, as well as domestic property investors with offshore structures.
In theory, ECTEA makes it much harder for the ultimate beneficial owners of UK property to remain anonymous through opaque offshore structures. It will no longer be possible for unregistered overseas entities (companies, trusts, foundations etc.) to buy or dispose of UK property, and likewise UK vendors will not be able to sell UK property to unregistered overseas entities.
Companies House administers and enforces the register. It is similar to the ‘Persons with significant control’ (PSC) register that already applies to UK companies.
The deadline for registration was 31 January 2023. Failure to register by that date was an offence, and the ECTEA carries heavy penalties for non-compliance – including fines up to £2,500 per day and imprisonment.
There was a rush to get registrations through by the deadline. It looks like many did not make it.
Limitations of ECTEA
In February 2023, Transparency International published a report on the implementation of the register (‘Through the keyhole – Emerging insights from the UK’s register of overseas entities’).
The report highlights a number of limitations to ECTEA, including:
- Failure to submit information (at the date of the report, around 40% of overseas entities had failed to register)
- Opaque companies being named as beneficial owners (the registrable beneficial owners are supposed to be those at the top of the tree – you have to keep going up until you reach someone who is a real person or a company that is subject to separate transparency obligations)
- Trust structures hiding the real owners (whilst the trustees are registrable, the beneficiaries and settlors are not – although Companies House does require their details as part of the registration process)
- Companies claiming to have no beneficial owners (25% ownership or control is the magic number as a rough rule of thumb, but because of the way the legislation is drafted it is likely that most entities should have at least one registrable owner)
- Naming service providers as beneficial owners (this would appear to be either a misunderstanding of the legislation, or a deliberate attempt to obfuscate ownership)
Through my own experience, I would also add that:
- The law is too complex. The phrasing and structure of the legislation, or at least the supporting guidance notes, should be simplified to encourage compliance. Bearing in mind that many registrants will take a DIY approach to save costs, I am confident that a lot of registrations are incorrect due to a basic misunderstanding of the requirements.
- The professional guidance is contradictory. As things stand, the approach a verification agent takes is likely to depend on how they are regulated. The BEIS official guidance suggests that the role of the verification agent is little more than rubber stamping the overseas entity’s conclusions about its beneficial owners, and to verify the identity of the registrable owners. Healthy professional scepticism is the order of the day. The Law Society guidance, on the other hand, flags to solicitors that the wording of the legislation does not allow for this approach, and the verifier can commit an offence if false or misleading information is submitted to the register. They say that verification agents must conduct a full legal and factual analysis to check their client’s workings. It would help if the professional bodies and government departments worked together on joint guidance, to avoid variations in the level of verification taking place.
- Useful intelligence on high risk structures is lost in the process. ECTEA requires registration of the ultimate beneficial owners and those with control of the overseas entity. However, intermediate entities in the ownership structure, including shell corporations in high risk jurisdictions, which might be highly suggestive of a shady structure, are not generally capable of registration. The aim of the legislation is to pierce the transparency these structures provide to reveal the ultimate ownership, but having the full picture of the structure itself would surely be valuable information in the fight against economic crime.
- The register has not been well communicated. Professional advisers may well have told their overseas clients about the incoming law and registration duties, but they were not obliged to do so. Bearing in mind implementation of ECTEA was rushed through in weeks, it is perhaps unsurprising that some overseas entities did not get the memo.
Verification agents and The Law Society
A central component of ECTEA is the role of the verification agent. This is the UK-regulated person or firm that verifies the ownership information supplied by the overseas entity, as well as the identity of the registrable beneficial owners.
The success of the entire regime relies on this verification. The government has effectively outsourced the first line of checks to the private sector, relying on professionals to act competently (and honestly).
Only those regulated under the Money Laundering Regulations with a supervising authority can act as a verification agent. For solicitors, this is the SRA.
The Law Society provided stark warnings about solicitors’ exposure to criminal and regulatory penalties in its July 2022 guidance (Register of overseas entities: what solicitors should know about verification). It suggests that there is a danger that practitioners will take on verification work under the mistaken assumption that ‘verification’ under ECTEA is the same as ‘verification’ under the Money Laundering Regulations.
Quite rightly, the guidance makes it clear that this would be incorrect and could lead to disastrous consequences for the solicitor. However, it goes so far the other way in highlighting risks – way beyond the BEIS official guidance – that it is no wonder that most law firms have chosen to give this work a wide berth. It would be strange if this was the professional body’s intention. If we accept that increased transparency is a legitimate way to make the UK a less desirable jurisdiction in which to park illicit money, and recognise that private sector verification plays a pivotal role, then the full involvement of the legal sector is certainly desirable.
As things stand, The Law Society’s guidance has made it hard for firms to justify getting involved.
My experience as a verification agent
The first step for me was to set up in a way that allowed me to act. As a solicitor with a practising certificate (which I don’t use in my compliance consultancy work), I was able to set myself up as a freelance solicitor. This is a relatively straightforward SRA application and took a matter of days. As part of the process, I had to register of money laundering supervision.
Although it took three attempts, it was also quite simple to register with Companies House and obtain an ‘agent assurance code’. You cannot be a verification agent without a code.
Once insurance was in place (not strictly required by the SRA for freelancers undertaking non-reserved legal work), I was ready to go so turned my mind to business development.
I knew there would be demand for the service, given the statutory deadline, so lightly tapped my professional network for access to clients. Surprisingly, this was pretty straightforward. It was not difficult to get referrals from trusted sources in the legal and accountancy sector.
Authorised verification agents are automatically included on a list curated by Companies House as well, so that registrants can find an authorised verifier. This channel has so far generated a couple of enquiries. I have not advertised or marketed in any other way.
From the outset I spent time thinking about my risk appetite, given the nature of the work. My view remains that relying on recommendations from trusted referral sources is a sensible first line of defence.
Beyond that, I decided to play it by ear. Any warning signs that the client was not being straight or there was something fishy about the instructions would not be worth getting involved with. That is, and remains, my red line.
I was also mindful of complying with the ever-expanding sanctions regime and broader AML legislation. Although not transactional work, the Proceeds of Crime and Terrorism Acts require a report to be made where the lawyer has knowledge or suspicion of economic crime. There may also be a discrepancy reporting obligation.
Some firms have a rule of thumb that they have to know the client in order to act as verifier. That is also a sensible approach, although not sustainable if you are looking to build a practice in this area. It would certainly be a good idea to draw up a list of red flags and red lines.
Perhaps one of the biggest areas of risk and compliance when taking on work in unfamiliar territory is competence and supervision. Solicitors are required to have the skills and competence to undertake instructions. The ECTEA and associated Verification Regulations are not simple pieces of legislation to get to grips with. I had to invest a lot of time in retraining myself through reading, watching webinars, poring over official guidance and talking to other professionals.
Firms taking this work should ensure that the people on the front line are capable and supervised.
The next thing that became apparent was that the terms of the retainer had to be really well scoped. Are you just verifying, or are you advising on the client’s wider affairs? Will you draft the mandatory information notices? Are you going to submit the registration application on the client’s behalf, or are they going to do it themselves? In my experience, most will want the solicitor to do the entire submission – the Companies House portal allows for this.
The retainer also had to be clear on the client’s responsibilities, and in particular full and transparent disclosure. Going into a relationship confident that your client isn’t hiding relevant information (and that if they are, you have an escape route), takes away much of the anxiety about submitting incorrect registrations.
Bear in mind that you will often need to involve other professionals to enable you to verify. For example, unless you are an expert in trusts and foundations based in offshore jurisdictions, you will need to liaise with someone who is. Translations may also be necessary, perhaps even local notaries. Your retainer therefore needs to give a certain level of flexibility on instructing third parties.
Due diligence on your client is also paramount. This goes well beyond the usual KYC checks. You will want to find anything and everything relevant in the public domain. News reports, social media, company records and so on – these will all help you to build a picture of the client’s background.
Ultra high net worth individuals tend to value their privacy. This registration process may come as a bit of a shock to them. You will be seeking in depth information about carefully structured family arrangements designed by some of the world’s most expensive lawyers to keep their personal information off the public record. That is a challenge you must be able to overcome – it is a matter of self preservation.
Given the amount of work involved in the legal and factual analysis at the outset is uncertain, particularly where more complex structures are involved, you should be careful about agreeing a fixed fee. It is not clear to me whether there is a ‘market rate’ for verification agents yet. To me, that did not really matter. I was quite happy to see potential clients walk away based on fees – the stakes are too high to compete on price. The competition includes trust and company service providers, accountants and other professionals. I do wonder to what extent they will have done the full legal analysis part that The Law Society suggests is necessary.
In summary, acting as a verification agent is not an easy option. The work can be time consuming. You have to take great care to get the bottom of complex corporate structures.
Will I keep doing this work? Almost certainly, if I have the capacity in my diary to do it. It was stimulating, interesting and enjoyable. Bearing in mind the annual updating requirement, there is certainly a practice to be made of this work for those solicitors and firms who are willing to take on the risk.
But I won’t be shy about turning clients away either. With hindsight, I think it was a sensible option to partner with trusted referral sources – that gives some immediate comfort that the client has already been through various levels of due diligence, not that I would rely on anybody else’s judgement. I would be much less comfortable with work ‘off the street’, for obvious reasons.