The existing legislation on the registration of ultimate owners has not yet fully met the presumed expectations, particularly in its contribution to the fight against money laundering or the prevention of conflicts of interest. Business corporations were obliged to register their beneficial owner in the Register of beneficial owners by 1 January 2019, but only a small number of companies have fulfilled this obligation, notably because there is no sanction now for non-compliance.
The Ministry of Justice has now submitted to the Government a bill of the Registration of beneficial owners Act which responds to the current situation and aims to transpose some new requirements concerning the registration of beneficial owners into the Czech legal order in accordance with the amending Directive of the European Parliament and the Council (EU) 2018/843 of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing and Directives 2009/138 / EC and 2013/36 / EU (hereinafter referred to as “V. AML Directive”). The period for transposition of this directive expires on 10 January 2020.
What changes are expected?
In order to implement the V. AML Directive into the Czech legal order, the legislation contained in a completely new separate act is proposed. Currently, the Register of beneficial owners and its regulation is regulated by Act No. 304/2013 Coll., on public registers of legal and natural persons and on the register of trust funds, as amended, which represents a not entirely satisfactory situation.
The legislation of the new act should newly include:
- a more detailed and precise definition of the beneficial owner;
- the definition of the means of access to the data in the beneficial owners’ register;
- a more sophisticated adaptation of the process of recording the data of the beneficial owner (registration in court proceedings or through a notary public);
- automatic transfer of some data from public registers to the register of beneficial owners – so-called automatic transcription;
- the procedure for dealing with incorrect or missing data in the register; and
- the imposition of penalties for infringements of the obligations relating to the registration of beneficial owners.
The term of beneficial owner
The current legislation is based on rebuttable presumptions and fulfillment of the material condition when determining the beneficial owner, which does not always lead to a clear determination of the beneficial owner. The new legislation should contain a clearer definition of the concept of beneficial owner, to which any natural person who is the ultimate recipient or claims an ultimate influence should be considered.
This should contribute to easier determination and definition of the beneficial owner. It should now also be possible to designate several natural persons as beneficial owners, where it will not be necessary for them to act in conformity in this case, as required under the current arrangements.
According to the bill, a more sophisticated system of rules containing predominantly rebuttable and irrebuttable presumptions will be used to determine the beneficial owner, as is the case so far.
Registration obligations
It should be recalled that in addition to the obligation to enter the records of ultimate owners, obliged entities are now obliged to keep internal records of ultimate owners and to keep this record including their changes for a period of 10 years from the termination of the beneficial owner’s status. The obligation of preservation (archiving) shall apply until the end of the obliged entity.
According to the bill, both above-mentioned obligations remain applicable, but they are supplemented by another obligation. This is also the obligation to record the steps taken to identify the beneficial owner if the beneficial owner of the corporation is a person in top management (please find more on this below).
Person in top management
The bill also newly introduces the term “person in top management”. According to the present proposal of the bill, it is a natural person who is a member of the statutory body of a legal person or a similar person or represents a legal person in this body or provides day-to-day management of the activities of a legal person and is directly subordinate to the statutory body of a legal person or its member.
In the event that the beneficial owner cannot be identified even with every effort that may be required, or if a legal entity that does not have the beneficial owner exercises ultimate influence, any person in top management is considered to be the beneficial owner. In order to be able to register the person in the top management as the beneficial owner, the steps taken to ensure that the beneficial owner is truly identified will have to be substantiated.
In comparison with the current legislation, which allowed the obliged entities to conclude that the ultimate owner is a member of the statutory body while setting it according to the legal presumption, the new legislation is more sophisticated and places higher demands on the honest procedure for obliged entities.
Holding structures
Under current legislation, it is not entirely clear who should be considered as the beneficial owner of companies owned by another company in more complex chained or branched structures.
In determining the untimed owner, the bill also tries to remember these more complicated structures and now works with the terms “chaining” and “branching”, when it considers chaining as “gaining advantage or exerting influence through successively connected persons or successively connected relationships; and branching as “gaining advantage or exerting influence through multiple individual chains”.
For the purposes of calculating the amount of the benefit share through another, according to the bill, in the case of chaining the share of benefits that the related persons have multiplied and for the purposes of branching the product of the shares of benefits from individual chains are added together.
Legal entity without ultimate owner
The bill also explicitly lists exhaustive legal entities that do not have a beneficial owner. For example, the state and local authorities, voluntary unions of municipalities, state contributory organizations, school legal entities established by the state, public research institutions, political parties and political movements, churches, trade unions, etc. does not have the beneficial owner.
Nor should be the unit-owner association subject of beneficial owner determination. However, associations or foundations are not excluded.
Sanction for not registering in Register of beneficial owners
Currently, there is no penalty for not registering the beneficia owner in the register. Under the newly proposed law, this should be changed and failure to register will be considered as offense, whereby a fine of up to CZK 50,000.- can be imposed by a court to the obliged entity. The court may also impose a sanction in the event that incorrect information entered in the records were not removed, that is up to the amount of CZK 250,000.-, even after a formal notice.
Proceeding of entry into a register
In this regard, the bill for a new legal regulation deviates from the current legal regulation, when newly the Registry court will lead a registration proceedings regarding the application for the entry of the beneficial owners into the register, whereas up till now there was no proceedings held and it was lead as a special court procedure without more precise rules. The new proposed legislation contains a sophisticated regulation of the registration procedure.
Notaries public will also be able to register in the register of beneficial owners, when it would no longer be necessary to make a notarial deed for the registration.
Newly, it is also envisaged that in simpler cases, where the state can find out the owner itself from other public registers, the ultimate owner will be registered automatically. Typically, it should be a company with a sole shareholder that is a natural person.
When determining the beneficial owner and its registration in the register, it will be possible to examine in more detail the documentation and materials for making such registration by the court.
The bill also contains special procedures to deal with some possible situations, such as addressing discrepancies in the Register of beneficial owners or making data on the beneficial owner unavailable.
Publicity of Register of beneficial owners
Relatively principal, but also expected change, which the new law brings is the introduction of publicity of the Register of beneficial owners. Everybody should have access to the Register of beneficial owners to the selected data in a manner allowing remote access (i.e. similar to the Commercial Register).
At the same time, anyone will be able to obtain an electronic confirmation of their non-registration in a way allowing remote access – a so-called negative statement.
Transitional provisions and planned effect
The bill also contains a relatively sophisticated modification of the transitional provisions, especially in relation to pending proceedings, already recorded data in the Register and transformation of the current records in accordance with the new act.
It also stipulates, that a obliged entity which is a business corporation and who has registered its ultimate owner in the Register of beneficial owners under existing legislation till 1 January 2019, if it was established till 31 December 2017, or till 15 days from its establishment, if it was established from 1 January 2018, it shall ensure, within 6 months from the date of entry of this Act into force, that valid data comply with the requirements of this act.
The new law provides for the obligation to update the data within 6 months from the date of entry into force of the act, which is proposed for 1 December 2020.
Conclusion
The new legislation should regulate the issue of identifying and entering the beneficial owners in the Register more comprehensively, thus ensuring the proper transposition of the V. AML Directive into the Czech legal order. It will bring significant changes, especially in the fact that failure to register the beneficial owner in the Register of beneficial owners will already be subject to imposition of sanctions, which should motivate obliged entities to fulfill their legal obligations. The positive news is that the draft of the new law also brings a more elaborate regulation of all fundamental rules and institutes within the given matter, which should facilitate the fulfillment of obligations.
If you have any questions regarding the matters of beneficial owners and their registration in the light of the above and current legislation we are at your disposal. Do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, law clerk – vajdova@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
26. 08. 2019