On 26 October 2023, the UK Parliament enacted the Economic Crime and Corporate Transparency Act (the Act). The Act marks a decisive shift in the statuary framework for addressing financial crime in the UK. The Act sets a clear direction for how Companies House should address financial crime. This includes the requirement that the identities of UK company directors should be verified.
Companies can be struck off for non-compliance with the identification verification requirements. This will have important consequences for the ownership of assets by non-compliant companies. Individuals avoiding the enforcement of debt judgements may transfer assets out of UK companies before any strike-off deadlines are reached. We have given some thought to the impact that the Act will have on asset identification and recovery.
Identity Verification Deadlines and UK Company Asset Transfers
Historically no identity verification was required to register a company in the UK. This has been one reason why some individuals have held their assets through UK companies. Companies have been registered with fictitious directors and shareholders. This has facilitated fraud, money laundering, and sanctions evasion.
This changes with the introduction of the Act, which will mandate compliance for existing UK-incorporated companies: including those established by criminals. Companies House is likely to introduce a date, or set of dates, on which existing UK companies may be struck off for failing to comply with the Act’s verification requirements. Individuals who had incorporated UK companies as low-cost vehicles for money laundering, fraud, or sanctions evasion will likely ignore requests for compliance and leave these companies to be struck off.
This begs the question of what happens to assets owned by those companies that will be struck off for non-compliance. The proponents of financial crime will likely transfer assets out of their soon-to-be-struck-off companies into new companies incorporated overseas. This may well have serious repercussions for how lawyers can deploy successful asset recovery strategies in civil claims in the UK. Specifically – in light of the Act’s impacts – successful asset recovery in the future is even more likely to necessitate looking outside of the UK for assets, requiring a transnational asset tracing exercise.
Where Will Criminals Choose to Register Companies Holding UK Assets After the Act?
While the UK’s old incorporation regime offered certain specific benefits, multiple jurisdictions are favoured for the laundering and storage of assets obtained through criminal enterprise. This includes jurisdictions with minimal filing requirements for financial information, such as Delaware in the U.S. or the British Virgin Islands. It also includes jurisdictions that allow for the use of nominee shareholders, such as the Isle of Man and Hong Kong.
When it comes to company incorporation, different jurisdictions serve different purposes for those seeking to avoid creditors, law enforcement, or otherwise hide their assets. However, when considering future asset transfers in the wake of the Act, we should consider the factors that made the UK attractive to those seeking to obscure the true ownership of assets. Chief among them is the relative ease of incorporation relative to the anonymity afforded by providing false information.
In February 2023, the European Court of Justice handed down a landmark ruling that removed public access to registers of beneficial ownership for all 27 countries in the EU. The ruling was met with concerns from journalists, transparency activists, and corporate investigators, fearing that this would result in lower transparency and accountability.
It is no longer possible to determine the beneficial owners of companies in jurisdictions such as Malta, Cyprus, and Luxembourg – all three of which are favoured destinations for their low tax and low regulatory requirements. For the same reasons, we could see the transfer of assets by criminals from UK companies to Maltese, Cypriot, and Luxembourgish companies.
What Impact Will This Have on International Asset Recovery?
Those currently contemplating legal action against indebted UK companies will need to consider the impact of the Act, and the increased likelihood of the transfer of assets from UK companies into companies incorporated overseas. The strike-off and dissolution of UK companies involved in financial crime may well create a whole new series of overseas companies established for receiving assets transferred out of the old UK companies.
The transfer of assets from a company incorporated in one jurisdiction to a company incorporated in another is nothing new. Debtors frequently exploit jurisdictional differences in company formation to protect their assets from the enforcement of debt judgements or arbitral awards. In our experience, companies and individuals seeking to avoid payment of debts will often try to obscure their ownership of properties, yachts, equities, and other assets. The obfuscation will typically include the transfer of assets from a company incorporated in the UK to a company incorporated in an “offshore” jurisdiction with minimal corporate transparency.
However, transferring assets into the ownership of overseas companies often leaves a paper trail for an investigator to follow. This is helpful from the perspective of asset recovery in civil fraud claims. This even applies in instances where those companies are incorporated in offshore jurisdictions with minimal transparency requirements. In cross-border fraud investigations, we often find that the securitisation of a vehicle, the purchase of property, or the licensing of a trademark, are all valuable in tracing a company’s assets which can aid legal processes for asset recovery.
To support litigation – whether contemplated or already launched - specialised asset tracing expertise is needed to pierce through the corporate veil in difficult jurisdictions. It is important to leverage a range of investigative tools and where appropriate, human sources, to uncover assets owned by companies in offshore jurisdictions. Examples of these tools include leaked company data, property planning permission records, registers of securities and charges, and archived social media data.
It is important that litigators, investigators, and regulators are prepared to consider the importance of cross-border asset tracing in the aftermath of any mass striking off of UK companies.
Ankura’s Asset Tracing & Complex Investigations team regularly conducts challenging cross-border asset traces in support of lawyers, corporations, and public bodies. The team is well positioned to help clients monitor the movement of assets across borders, including those created by regulatory changes such as the ECCT act.
© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
