IFA warns of “critical understanding” in ROE verification process

Accountants must get to grips with the detailed verification requirements before agreeing to verify the identities of any beneficial owners or managing officers included in the Register of Overseas Entities. Failure to do so could leave the accountant open to legal and regulatory action warns the Institute of Financial Accountants (IFA).

Implementation of the Register of Overseas Entities (ROE) is among the reforms that came into force last year to tackle economic crime. Agents, such as accountants, must understand the requirements of the regime if asked to carry out the verification checks on behalf of an entity.

In August 2022, the ROE, created under the Economic Crime (Transparency and Enforcement) Act 2022, came into effect. The Act requires overseas entities that own property in the UK, or hold a lease of such property granted for a term of more than seven years, to register with Companies House. A critical element of the ROE regime is the requirement to obtain independent verification of the entity’s beneficial owners and, if applicable, the managing officers, before an application for registration is submitted. This must be done in accordance with the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022.

Should accountants choose to provide verification but fail to comply with the Regulations, it will leave them open to possible criminal prosecution. Therefore, any firm seeking, or agreeing, to carry out this service must not assume that the client due diligence (CDD) process usually carried out to comply with their anti-money laundering (AML) obligations will meet the standard required for verification.

In its risk assessment associated with this work, The Accountancy AML Supervisors Group (AASG) recently issued its AML alert and stated that “the drafting of the Verification Regulations means that there is a strict liability in place and the accountancy professional body supervisors are concerned that any firm acting as a verifier will face significant challenges and expose itself to significant risk, including possible criminal prosecution, regulatory sanction, and reputational damage.”

It has also highlighted the following key risks that firms should consider if they agree to perform verification work for the purpose of an ROE registration:

• The very nature of the ROE means ownership structures will involve corporate structures spanning overseas jurisdictions – firms should consider:
• the business rationale for that structure and whether they understand its purpose and that it makes commercial sense;
• the AML risk associated with those overseas jurisdictions;
• the extent to which the firm understands the laws in place in the overseas jurisdiction;
• whether the firm knows what official documents for that overseas jurisdiction look like – and that they can be certain that documents haven’t been forged;
• whether there are any indications the legal ownership may not reflect true ownership and control.
• Verification should be completed based on documents or information that come from a reliable source, independent of the client. Firms should consider the following risk factors in relation to these documents:
• If the client is an existing client, the firm should consider the extent to which they can rely on information already obtained through CDD procedures. This information may not always go far enough – as firms can’t take a risk-based approach to ROE verification.
• Does the firm need to repeat those checks performed as CDD where the work was undertaken some time ago, or where the client’s structure has changed? Regulation 6 of the Verification Regulations sets out that the verification must happen before the information is submitted to Companies House, but not more than three months before.
• Verification is at a point in time – so if the beneficial ownership changes after the verification date the firm may be associated with a registration that is no longer correct. The entity is obliged to notify Companies House and to use an agent to verify the new information.
• For new clients, whether you trust the sources of information and are certain that any independent legal adviser that may have certified documents is, in fact, independent.
• Some information may only be available from the client – for example a trust deed. In these cases, it will be essential to consider how this information can be verified (for example by seeking confirmation from the legal firm that drafted it).

The IFA is not only concerned about the responsibilities and expectations placed on its members but every professional accountant. Firms should carefully consider whether they are willing to provide this verification work. What is critical for them to be mindful of is that the work required for verification under the ROE is not the same as the risk-based approach to client due diligence under the Money Laundering Regulations; firms should familiarise themselves with the differences.

This is supported by guidance from the Department for Business, Energy and Industrial Strategy (BEIS), which highlights that there are differences between what’s required under the Money Laundering Regulations (MLRs) by way of client due diligence and what is required by way of verification under the Verification Regulations. As such, a relevant person must not only do what they would normally do under the MLRs (and as set out in related industry guidance); they must also refer to the Act, the Verification Regulations and the BEIS guidance when conducting verification checks.

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Our view is that firms should not entertain any approaches unless they are from existing clients or they are fully aware of the requirements and the identities of the entity, otherwise they are potentially exposing themselves to potential prosecution.