Introduction
We can probably all agree that the following activities are undesirable in any self-respecting liberal democracy:
- Unlawful tax evasion
- Money laundering.
- The hiding of illicit wealth.
And if one is a money-launderer or a tax evader or one wishes to hide one's illicit wealth, then being able to use opaque offshore corporate or trust structures to, in effect, "hide" one's beneficial ownership of UK corporates or UK real estate is patently more than just a little bit helpful - one might say it is positively enabling.
The UK Government clearly thinks so and has legislated to provide for three beneficial ownership registers that must be kept current and up to date on pain of severe criminal and civil sanctions.
- The first is the Register of People with Significant Control maintained by Companies House, which came into being in the UK under the terms of the Small Business, Enterprise and Employment Act 2015 which introduced a new Part 21A (Information About People With Significant Control) to the Companies Act 2006. Pursuant to that and other Acts of Parliament, the following UK entities must maintain a PSC Register at Companies House:
- All limited companies (except certain listed companies)
- All limited liability partnerships.
- Scottish limited partnerships.
- Scottish qualifying partnerships.
The PSC rules are complex, but the net effect is that any natural person who is, directly or indirectly, an ultimate beneficial owner of voting rights or equity interests (i.e. shares or membership or partnership interests) representing a controlling influence in any such entity (with any such ultimate beneficial owner being a "UBO") must be capable of being identified by anyone through publicly available and searchable registers.
- The second is the Register of Overseas Entities maintained by Companies House, which came into being in the UK under the terms of the Economic Crime (Transparency and Enforcement) Act 2022 ("ECTEA"). ECTEA applies to all UK real estate and therefore affects the following land registers:
- In England and Wales, His Majesty's Land Registry.
- In Scotland, the General Register of Sasines and the Land Register of Scotland.
- In Northern Ireland, the Land Registry.
The ECTEA rules on beneficial ownership are based on the PSC rules and take effect in similar terms, with the net result being that, where an overseas entity (being a corporation, a partnership or any other entity that is a legal person (which will include a trust in some contexts) registered, incorporated or established in an overseas country) owns (or in certain cases, leases) UK real estate, that overseas entity must be registered in the Register of Overseas Entities together with statutorily prescribed information such that any UBO of such overseas entity must be capable of being identified by anyone through publicly available and searchable registers.
ECTEA takes retrospective effect so that overseas entities which acquired real estate situated in England & Wales on or after 1 January 1999 but before 1 August 2022 have until 31 January 2023 to register. In Scotland, overseas entities which acquired real estate situated in Scotland on or after 8 December 2014 but before 1 August 2022 likewise have until 31 January 2023 to register.
From 5 September 2022, overseas entities must register in the Register of Overseas Entities before they can acquire ownership of land or certain leases anywhere in the UK.
- The third is the UK Trust Registration Service (the "TRS") which is maintained by His Majesty's Revenue & Customs and came into being in 2017 to satisfy the requirements of Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (as amended, the "AML Directive") and UK implementing and enabling legislation. New rules came into force in October 2020 that require all UK trusts, apart from a few exceptions[1] and some non-UK trusts to register with HMRC.
Previously, only trusts that paid certain taxes were required to register with the TRS. The new rules have widened the TRS to all UK trusts including ones not liable to tax unless the trust is specifically excluded.
The data on TRS is only available to those with a ‘legitimate interest’, such as law enforcement agencies investigating money laundering and the financing of terrorist activities. HMRC can refuse access where there is a disproportionate risk of exposing the beneficial owner to, for example, fraud, blackmail, or intimidation.
In addition to these three UK-wide registers, in Scotland, another new transparency register, the Register of Persons Holding a Controlled Interest in Land (the "RCI") was introduced in April 2022[2]. The primary purpose of this register is to increase public transparency in relation to individuals who have control over decision-making in relation to land enabling communities and individuals to more easily identify who they should engage with on decisions about the land (rather than to prevent land and property being used for money laundering purposes). The RCI is relevant to certain categories of owners of Scottish land (individuals, partnerships, trusts, unincorporated bodies or overseas entities) as well as tenants of Scottish land registrable leases (i.e. leases of over 20 years in duration) in Scotland where there is another party with significant influence or control over the decision making in relation to that land and that controlling interest is not transparent. Where the Regulations are engaged, information about "Associates" (the individual or entity who, in terms of the RCI regulations, has significant influence or control over the decision making in relation to a property) of registered owners or tenants is publicly available and searchable in the RCI.
The effects of the RCI will be similar to the UK-wide registers previously referred to and so, in this article, we refer to all four of the registers as the "UK Registers" and each an "UK Register".
In an international context, very similar registers have been brought into effect across countries which are in the European Economic Area[3] in accordance with the AML Directive and implementing domestic legislation. What we are therefore seeing here is an international drive towards transparency of ownership to aid in the battle against organised crime and unlawful tax evasion.
But what if the "great and the good" of the international technocracy did not consider the effects of human rights charters and legislation in this regard? And what if a court were to hold that such registers were incompatible with, for example, a fundamental human right to respect for private and family life? What then for the almost inexorable momentum that has gathered pace towards an international rules based system under which there are very few havens left in which to hide for those with illicit wealth or those who wish to engage in unlawful tax evasion?
In fact, that is precisely what has happened recently in the European Court of Justice when considering two challenges (being WM (C-37/20) and Sovim SA (C-601/20)) brought to the laws of Luxembourg as regards the Register of Beneficial Owners in that jurisdiction in the context of both the AML Directive and the EU Charter of Fundamental Rights (the "EU Charter")[4].
What implications might this ECJ case have in respect of the ongoing validity of the UK Registers?
The ECJ Case
The case involved a referral from the Luxembourg District Court in connection with the Register of Beneficial Ownership set-up under legislation passed in Luxembourg in implementation of the relevant section of the AML Directive. The Luxembourgish Register of Beneficial Owners applies to UBOs of corporate entities incorporated or established in Luxembourg.
In one of the cases, Sovim SA applied to the Luxembourg Business Register to have its UBO information restricted so that it was accessible only by "national authorities, credit institutions, financial institutions, bailiffs and notaries acting in their capacity as public officers" and not by members of the general public, on the basis that otherwise such UBOs would be exposed to a "disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation", all in accordance with the terms of the AML Directive and the Luxembourgish implementing legislation. However, the LBR refused the application and accordingly Sovim brought an action before the Luxembourg District Court arguing, inter alia that granting public access to the identity and personal data of its UBO would infringe the right to respect for private and family life and the right to the protection of personal data, enshrined respectively in Articles 7 and 8 of the EU Charter.
The Luxembourg District Court stayed proceedings and referred this and other questions to the ECJ for a preliminary ruling.
Article 7 of the EU Charter concerns the right to privacy and family life and is in the following terms:
"Everyone has the right to respect for his or her private and family life, home and communications."
Article 8 of the EU Charter relates to the right to protection of personal data, which finds broader effect in an EU perspective under the terms of Regulation (EU) 2016/679 (General Data Protection Regulation) (the "GDPR"). Being an EU Regulation, the GDPR has direct effect across all EEA Countries.
The EU Charter occupies a slightly incongruous position in EU law in the sense that it is not directly binding law, but it must be complied with by EU institutions when promulgating EU Directives and Regulations and by EEA Countries when passing domestic laws which give effect to, or amplify, EU Directives and Regulations.
In any event, the ECJ agreed with Sovim and held that making information regarding beneficial owners available in a register searchable by the general public in Luxembourg was inconsistent with Articles 7 and 8 of the EU Charter. The following passages of the judgment are worthy of note in this regard:
- At para 39:
"It should also be noted that, as is apparent from the Court’s settled case-law, making personal data available to third parties constitutes an interference with the fundamental rights enshrined in Articles 7 and 8 of the Charter, whatever the subsequent use of the information communicated. In that connection, it does not matter whether the information in question relating to private life is sensitive or whether the persons concerned have been inconvenienced in any way on account of that interference."
- At paras 41 through 44:
"As regards the seriousness of that interference, it is important to note that, in so far as the information made available to the general public relates to the identity of the beneficial owner as well as to the nature and extent of the beneficial interest held in corporate or other legal entities, that information is capable of enabling a profile to be drawn up concerning certain personal identifying data more or less extensive in nature depending on the configuration of national law, the state of the person’s wealth and the economic sectors, countries and specific undertakings in which he or she has invested."
"In addition, it is inherent in making that information available to the general public in such a manner that it is then accessible to a potentially unlimited number of persons, with the result that such processing of personal data is liable to enable that information to be freely accessed also by persons who, for reasons unrelated to the objective pursued by that measure, seek to find out about, inter alia, the material and financial situation of a beneficial owner.
"Furthermore, the potential consequences for the data subjects resulting from possible abuse of their personal data are exacerbated by the fact that, once those data have been made available to the general public, they can not only be freely consulted, but also retained and disseminated and that, in the event of such successive processing, it becomes increasingly difficult, or even illusory, for those data subjects to defend themselves effectively against abuse."
"Accordingly, the general public’s access to information on beneficial ownership…………… constitutes a serious interference with the fundamental rights enshrined in Articles 7 and 8 of the [EU] Charter."
What will be seen from the above is that even the relatively straightforward provision of information ascertainable by the general public as regards a UBO of their name and the extent of their beneficial interest in a corporate is inconsistent with, and indeed constitutes "a serious interference with", Articles 7 and 8 of the EU Charter.
What this judgment means is that any Register of Beneficial Owners maintained in an EEA Country which identifies the UBO of an applicable entity and the extent of that UBO's interest and makes that information available to the general public is unlawful since it constitutes a serious interference with the fundamental rights enshrined in Articles 7 and 8 of the EU Charter. Indeed, we understand that the Netherlands has as a result ordered the closure of its Register of Beneficial Owners, and no doubt other EEA Countries will follow suit.
Brexit and all that
Those of you who have not fallen asleep by this stage will no doubt be wondering what on Earth all of this has to do with the UK given that this country is no longer a member of the European Union and hasn't been since 11pm on 31 January 2020. That's a good question and it is especially so when one considers that the UK legislation which gave effect to Brexit and provided for the adoption of a raft of EU laws into UK law specifically clarified that the EU Charter was not an adopted EU law in the UK (see section 5(4) of the European Union (Withdrawal) Act 2018). Accordingly, the EU Charter finds no effect in UK law.
Whilst that is undoubtedly correct, the position in the UK has a touch more nuance to it for two reasons:
1. First of all, whilst the EU Charter is not part of UK law, the European Convention on Human Rights (the "ECHR") very much is part of UK law through the Human Rights Act 1998. Article 8 of the ECHR sets out a "right to respect for private and family life" which is in very similar terms to Article 7 of the EU Charter:
"Everyone has the right to respect for his private and family life, his home and his correspondence."
Where the ECHR differs from the EU Charter in respect of this human right is that the ECHR goes on to clarify at Article 8(2) that there "shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others." We refer to that as the "Public Interest Exemption". Article 7 of the EU Charter contains no similar or equivalent provision.
2. Secondly, the UK has adopted the terms of the GDPR into law through the European Union (Withdrawal) Act 2018, and has thereafter modified the GDPR through the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019/419 (as so implemented and modified, the "UK GDPR"). The UK GDPR is supplemented and amplified by the Data Protection Act 2018, through which the UK has in certain respects adopted more stringent data protection rules than those required under the original text of the GDPR. So whilst the UK does not grant a fundamental human right in respect of data protection to its citizens equivalent to Article 8 of the EU Charter (since there is no equivalent human right in the ECHR), nevertheless data protection is undoubtedly a fundamental right under UK law directly actionable in the courts, and this ultimately derives from EU law in the form of the GDPR.
Accordingly, the judgment of the ECJ in this regard can be considered to be persuasive and perhaps even highly so in the context of Article 8 of the ECHR in respect of the "right to respect for private and family life". Accordingly, if an applicable legal entity or its UBO were to bring an argument in a UK Court that any of the UK Registers which are publicly searchable (in other words, the PSC Register, the Register of Overseas Entities and the RCI, but not, at the current time, the TRS) contravened either Article 8 of the ECHR or the GDPR, then the judgment of the ECJ as regards the EU Charter may well be given considerable weight by the UK Court.
Having said that, Article 8 of the ECHR is subject to the Public Interest Exemption whereas Article 7 of the EU Charter is not. A UK court may therefore conclude that the ECJ judgment is not binding or persuasive since the Public Interest Exemption applies in a manner which takes the UK Registers outside of the protection provided by Article 8 of the ECHR. And, as regards the UK GDPR, it seems likely that the processing of personal data for the purposes of the UK Registers will be justified on the lawful basis of the legal obligations set out in the applicable legislation (see Article 6(1)(c) of the UK GDPR) and in addition that the exemption from data protection obligations set out in paragraph 5(1) of Schedule 2 of the Data Protection Act 2018 will apply to the publication of certain personal data on these UK Registers.
Nevertheless, the ultimate arbiter of the ECHR is the European Court of Human Rights in Strasbourg such that, even if the UK Supreme Court were to hold that the ECHR was inapplicable or somehow not engaged (whether through the Public Interest Exemption or otherwise), a litigant could appeal to the European Court of Human Rights. Indeed, a UK Court may well stay proceedings and seek a preliminary judgment of the European Court of Human Rights were the point to be taken by a litigant in an action before it. The European Court of Human Rights may very well be persuaded to follow the reasoning of the ECJ (a fellow European court) in this regard, particularly given that the EU Charter and the ECHR are in more or less identical terms when it comes to the wording of the right to respect for private and family life (subject to the Public Interest Exemption).
And if the European Court of Human Rights found itself persuaded by the ECJ's general approach to fundamental human rights in this regard then it may not pay as much cognisance to the Public Interest Exemption as one might otherwise expect a UK court to be more likely to do. This is because the ECJ recognised that there is a balancing act which needs to be struck between the aims of a particular piece of legislation (in this case, the AML Directive and the Luxembourgish implementing legislation) and the public interest in seeing that those aims are achieved on the one hand, and on the other hand ensuring that the effects of the legislation are proportionate in the sense that they do not give rise to a disproportionately serious interference with the fundamental rights provided for in the EU Charter.
It is therefore entirely possible that the European Court of Human Rights would consider the UK Registers to be disproportionate in effect in the sense of the ECJ ruling.
Conclusions
It is difficult to say how the ECJ judgment will play out in countries which are not in the European Economic Area and which are therefore not subject to the jurisdiction of the ECJ. However, there must now be considered to be some risk that the PSC Register, the Register of Overseas Entities and the RCI in the UK are incompatible with Article 8 of the ECHR. No doubt the UK and Scottish Governments consider otherwise and ultimately the UK Parliament at Westminster is sovereign so its enacted statutes are inviolable law (including, as regards the RCI, the delegation of legislative powers in respect of devolved matters to the Scottish Parliament at Holyrood under the terms of the Scotland Act 1998). But it is not possible to discount the possibility that the ECJ judgment will give rise to ECHR challenges to the UK Registers in the UK Courts (noting that, as an Act of the UK Parliament itself, the Human Rights Act 1998 is inviolable sovereign law as well). And whilst one might consider that the UK Courts would seek to give effect to UK Acts of Parliament in so far as possible, perhaps relying on the Public Interest Exemption to do so in this case, the European Court of Human Rights is more likely to consider itself persuaded, and possibly even bound, by the approach of the ECJ as regards a fundamental human right in the EU Charter which is in almost identical terms to the equivalent human right in the ECHR (albeit in this case subject to the Public Interest Exemption).
What we think we are also seeing here is a sudden halt to the inexorable momentum in international affairs towards absolute transparency of ownership in the fight against organised crime and tax evasion. Countries may well have to consider whether maintaining publicly searchable registers of this nature is in fact proportionate in a wider sense, including as regards human rights. In this context, it may be necessary for the UK Government (and the Scottish Government as regards the RCI) to restrict access to the UK Registers to those who can show a legitimate interest in accessing the information, or even to close down the UK Registers completely.
[1] The full list of trusts which are excluded from the requirement to register with the TRS can be found here: GOV.UK (www.gov.uk). The list includes pension schemes, charitable trusts and bank accounts held for minors.
[2] The RCI is governed by the Land Reform (Scotland) Act 2016 (Register of Persons Holding a Controlled Interest in Land) (Scotland) Regulations 2021.
[3] Being all Member States of the European Union, Lichtenstein, Iceland and Norway (and also Switzerland, which is neither a member of the EU nor an EEA country, but it is part of the single market and must comply with EU laws through a series of bilateral treaties with the EU). For ease, we refer to each such country as an "EEA Country" in this article.
[4] See ECJ Preliminary Judgment in re WM (C-37/20) and Sovim SA (C-601/20).
We thank Melanie Schwindt for her helpful input into this article as regards UK GDPR and related legislation.
