Written by Lincoln Caylor, Nathan Shaheen and Shaan Tolani
The United Kingdom recently passed the Economic Crime (Transparency and Enforcement) Act (ECA) on an expedited basis, bringing key changes to help the UK government and law enforcement combat financial crime.
Not only do these changes impose direct requirements on certain Canadian entities, but these and other upcoming changes (such as those related to cryptocurrency) may catalyze the modernization and implementation of similar laws by Canada.
On March 15, 2022, the ECA received Royal Assent roughly two weeks after being published. This expedited process came years after an initial draft of the bill was published, as a direct response to the conflict in Ukraine.
While not without their critics, the changes in the ECA aim to provide the UK Government and law enforcement agencies with additional and easier-to-use tools to deter and prevent economic crimes. In particular, the recent reforms provide and improve on three such tools:
- A beneficial ownership registry for foreign entities holding UK property;
- Unexplained wealth orders (UWOs); and
- Penalties for breaches of financial sanctions.
ECA provisions in relation to the imposition of sanctions have already taken effect, while the provisions related to monetary penalties for breaches of those sanctions, UWOs and the beneficial ownership registry are expected to come into force shortly. Each of the three tools are addressed further below.
Beneficial Ownership Registry
The ECA establishes a long-promised, publicly-accessible register of foreign legal entities (including companies) that own UK land and property. According to the explanatory notes to the ECA, the purpose of the registry is to
[p]revent and combat the use of land in the UK for money laundering purposes by increasing the transparency of beneficial ownership information relating to overseas entities that own land in the UK to prevent and combat the use of land in the UK by overseas entities as a means to launder money or invest illicit funds.
Foreign legal entities (including Canadian entities) must now apply to the Companies House to register their UK land and property holdings. This requirement goes beyond future purchases – it retroactively covers land and property bought after January 1, 1999 (save for holdings in Scotland, the retroactive date of which is December 8, 2014). To help facilitate this requirement, the ECA contains a 6-month transition for such registrations to be completed.
Along with registering their land and property holdings, foreign legal entities must also identify, and annually update, their “Registrable Beneficial Owners,” which, according to the ECA, generally includes the individuals who, indirectly or directly:
- Hold over 25 percent of shares or voting rights of an entity;
- Hold the right to appoint or remove a majority of the directors of an entity; or
- Have the right to exercise, or exercises, “significant influence or control” over an entity.
Under the ECA, there are serious consequences for failing to meet registration or update requirements, including a bar on being classified as a legal owner under the HM Land Registry, an encumbrance on title and/or economic and criminal penalties.
Since 2018, the UK court has been authorized to grant UWOs when there are “reasonable grounds” to suspect that an individual’s known sources of income would not enable them to obtain property which they currently hold, and that person is (1) a politically exposed person, (2) connected to a politically exposed person, or (3) suspected of being involved in serious crime anywhere in the world.
Once served with the UWO, the individual must explain and prove how they obtained the funds used to purchase the property. Absent such proof, there is a presumption in favour of law enforcement agencies that make it easier to freeze or seize the property.
The ECA widens the scope of UWOs and removes hurdles to seeking them:
- UWOs now go beyond individuals. The “responsible officers” of an entity may be subject to OWOs. This expanded scope may be particularly notable in light of the insight gained from the above-noted registry of beneficial owners.
- The ECA limits the costs that enforcement authorities must pay on a failed UWO application, thereby mitigating a potential deterrent to bringing an application.
- The enforcement authorities are also given a longer time period to investigate and determine whether to discharge interim freezing orders over the assets in question.
The ECA lowers the threshold to impose, and increases the severity of penalties for, financial sanctions. Previously, penalties could be imposed only if the target “knew” or “had reasonable cause to suspect” it was breaching sanctions. The ECA removes this knowledge component, making the violation of sanctions a strict liability offence. In other words, there is no legally relevant “excuse” for breaching the sanctions or to avoid the resulting penalty.
The ECA also grants the Office for Financial Sanctions Implantations (the UK body that enforces financial sanctions) the ability to cause reputational damage. In particular, even if the Office does not penalize a party, it may publicly “name and shame” a company or individual that it believes, on a balance of probabilities, breached a financial sanction or flouted certain obligations.
In addition, in direct response to the conflict in Ukraine, the UK government may now designate individuals and entities for the purpose of imposing sanctions more quickly. This includes an urgent procedure mechanism, which allows Ministers to designate a person or entity for a limited period if certain other countries (i.e., United States, the European Union, Australia, or Canada) have already done so, and if the Minister determines that doing so is in the public interest.
Additional Upcoming Changes Related to Cryptocurrency
The UK is expected to introduce another wave of economic crime related measures later this year. These changes include, among others, reforms that legislate powers to seize digital assets, in order to address cryptocurrency related fraud and money laundering. This issue is topical and ripe for legislative guidance.
In the UK, courts have addressed a number of recent cryptocurrency related injunctions, including cryptocurrency fraud claims, under existing common law mechanisms for injunctive relief.
Similarly, in Canada, the Ontario Superior Court recently issued a Mareva order to freeze certain persons’ digital assets (those held in their cryptocurrency wallets) in relation to the “Freedom Convoy”—a well-publicized series of protests and blockades in Canada against COVID-19 mandates and restrictions. In another case, the Ontario Superior Court issued an Anton Piller order in respect of cryptocurrency tokens.
As cryptocurrency and other digital assets continue to become more mainstream, we expect they will become subject to even more debate on how they fit, or do not fit, into our current legal regime. It will become important for legislators to determine how our current law around economic crime must be modified to consider the unique aspects of cryptocurrency. The UK has suggested it is already doing so, and may provide Canadian legislators with some additional guidance soon.
Implications for Canada
The implications of the ECA on Canadians go beyond the actual registration requirements imposed on those Canadian entities holding property and land in the UK. The sweeping changes (including the ones to come) may serve as a catalyst to update Canadian laws.
Like other leading nations, Canada has already signaled its intent to modernize its legal regime in respect of economic crime. For example:
- Beneficial ownership registries have been the subject of recent debate and proposed investment by the Canadian government, including in its 2021 and 2002 annual federal budgets.
- In June 2021, there were significant amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its regulations. These changes expanded the industries to which the PCMLTFA and its regulations apply, and introduced new and increasingly-stringent rules, including on beneficial ownership, virtual currencies and compliance programs. Further amendments followed in April 2022 for the purpose of addressing “crowdfunding platforms.”
- Ontario’s 2021 Fall Economic Statement announced an intention to address money laundering and other illicit financial activities by amending Ontario’s Business Corporations Act to require privately-held Ontario corporations to record the identities and various other details of all individuals who exercise control over those corporations.
The UK expediting its bill and demonstrating the pressing nature of updating economic crime legislation may serve as a catalyst for Canada to do the same. Moreover, Canadian legislators may not only receive ideas on new tools to add to country’s arsenal to combat economic crime, but the knowledge of how to actually implement those tools on the ground level, along with a test case.
- The ECA provides new and improved tools to the UK Government and law enforcement agencies to deter and prevent economic crimes. These relate to a beneficial ownership registry, UWOs and financial sanctions.
- Under the new legislation, foreign entities (including Canadian ones) will soon have to register their UK land and property holdings, including by identifying any registrable beneficial owners.
- The UK government has signaled this is only the first wave of more changes to come soon. One of these upcoming changes includes reforms that legislate powers to seize digital assets, in order to address cryptocurrency related fraud and money laundering.
- These changes may expedite Canada’s modernization and implementation of similar laws to address economic crime.
If you have any questions about the information in this blog post or need legal counsel regarding financial crime, regulations, or anti-money laundering related issues, please contact a member of the Bennett Jones Anti-Money Laundering Group.