How to manage AML risks: 3 red flags for the Register of Overseas Entities

The Register of Overseas Entities requires UK property owners who reside overseas, as well as any overseas entities that may take part in land and property transactions, to register with Companies House – including identifying beneficial owners and managing officers of the entity. It is part of the Economic Crime (Transparency and Enforcement) Act 2022, and came into force on 1 August 2022.

The requirement to register with Companies House applies to overseas entities that bought property in:

• England and Wales: 1 January 1999 onwards
• Scotland: 8 December 2014 onwards
• Northern Ireland: 1 August 2022 onwards

Companies House explains the goal of the register: increased transparency enabling more effective investigations of suspicious wealth.

Overseas entities need UK-regulated agents to complete the verification checks on all beneficial owners, and the agents must have assurance codes from Companies House.

Recently, members have contacted the IFA team to ask about the process of registration with Companies House, and the risks associated with registering overseas entities – particularly those who are not already clients of the accounting firms.

The process of registering with Companies House

Accountants must first register with Companies House to be able to provide this service, and they must specify their professional body supervisor, for example the IFA, so that Companies House can verify the information the agent has provided.

Once an agent is registered, they can submit to the Register of Overseas Entities.

That may be a fairly straightforward process if the entity is already a client – the agent should already have conducted enhanced due diligence processes, have a clear idea of the beneficial owners and the source of wealth, and have all the related documentation. As long as the information has been verified in the previous three months, the agent may be comfortable going ahead and adding this entity to the register.

The registration must be re-verified annually – and it is necessary to ensure you are up to date at that point with any changes in the entity, its ownership structure and the beneficial owners.

Again, this is easier when working with a current accounting client, rather than conducting this registration as a one-off transaction.

Red flags

There are many reasons for an overseas entity to own property or land in the UK. It might be property a family lives in, and they are availing themselves of tax breaks through an ownership structure that includes an overseas entity. That’s a very simple structure generally.

Or the ownership structure might be complex and designed to obscure beneficial ownership. That might relate to other legal entities or people on sanctions lists.

That’s why it’s important to approach the situation with professional scepticism, and question who the beneficial owner really is, who they're associated with and what the risks are, and to question whether you can manage and mitigate those risks.

As well as your enhanced due diligence, look for these red flags in particular.

• New clients: Any accountant who has been approached to register an overseas entity should first of all understand why the entity has approached them in particular. We advise members to exercise real professional scepticism in answering this question.
  
  In particular, if your firm is not large enough to have a knowledge base and experience of dealing with this, and you get a request to provide this service for a company incorporated in a tax haven jurisdiction you've got to ask yourself why you are being asked to do this.
  
  
• Complex structures: Then the agent must understand the rationale for the entity’s structure very well – does it make commercial sense?
  
  If an organisation has been registered in the British Virgin Islands, with a trust that is set up in Cyprus as its beneficial owner, with overseas nationals as the trustees, it may be difficult to determine the business rationale for that structure. The agent must ensure that they’re satisfied that the whole structure makes sense, and the beneficial owners are who they say they are – otherwise it is best not to act as the agent and not to register the entity.
  
  
• High-risk jurisdictions: Certain jurisdictions carry higher risks. And the agent’s due diligence must look right through the beneficiary structure – not just at where the entity is registered but at the trustees or the beneficial owners. Ask how the land has been purchased or how it is being purchased, what the nature of the land is, and about the rationale behind the entity owning the property.

If you encounter these red flags, pay attention to them. Exercise professional scepticism, ask more questions and, if you aren't satisfied that you have the full picture, disengage and submit a suspicious activity report.

The IFA’s AML Matters webinars help build understanding of anti-money laundering requirements for members and accounting professionals. The next instalment is on 1 November 2023, with previous sessions available on-demand now. Find out more.