In our article on the legal regulation of the Register of Beneficial Owners and their planned changes, we informed you about the forthcoming bill of the Registration of Beneficial Owners Act. The aforementioned bill and the related amending legislation, the Public Legal Registers Act and the AML Act, have since undergone further developments within the legislative process.
The current state – in general
The Register of Beneficial Owners was introduced into the Czech legal system in 2017 with the obligation to make a registration of beneficial owners of legal entities, in principle by 1 January 2018. However, the legal regulation of the records of beneficial owners is insufficient and requires changes to make the legal regulation in question enforceable and functional.
The legal regulations do not stipulate any direct sanctions (fine or other sanction) for violation of the obligation to identify the beneficial owner or owners and make an entry into the Register of Beneficial Owners. Failure to enter into the Register of Beneficial Owners, however, can cause certain administrative complications in the so-called monitored activities, such as negotiations with banks, participation in public contracts or custody with a lawyer or notary during the client’s inspection.
At the same time, the records of the beneficial owners are not publicly accessible and only persons and entities that are obliged under the AML Act to inspect their clients have access to it.
Therefore, how in practice should the records of beneficial owners change according to the current version of the bills and what can we expect from this amendment to the law? We will try to explain this in the following paragraphs.
The legislative development
The aforementioned bills were submitted by the Government of the Czech Republic to the Chamber of Deputies on 8 June 2020, and are now expected to be discussed in the 2nd reading, which is planned for 6 September 2020. 
The aim of the legislative changes in particular is to adjust the legal regulation of the Register of Beneficial Owners in terms of its improvement and clarification, as well as to transpose the new Directive (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 the “V. AML Directive”).
In particular, the V. AML Directive introduces the following new obligations on Member States:
- ensure public availability of data entered into national records of beneficial owners;
- introduce direct sanctions for breaches of the obligation of registration.
The deadline for transposition of the 5th AML Directive expired on 10 January 2020.
The expected and proposed effectiveness of the Registration of Beneficial Owners Act and related changes in other legal regulations is the first day of the fourth calendar month following its promulgation. With the standard and smooth course of the legislative process, in our opinion, the changes can be expected to take effect in the spring of 2021.
Beneficial owner and his identification
The bill is intended to introduce a more precise definition of the term ‘beneficial owner’ compared to the current regulation. The beneficial owner should be any natural person who is a final beneficiary or a person with ultimate influence, where the identification limit of 25% on distributed benefit and 25% on voting rights is maintained – both directly or indirectly.
The final influence is usually understood as the right to exercise a decisive influence directly or indirectly over a legal person or to participate in the administration of a legal order.
End-users can follow each other, creating a structure in which the natural person oversees the day-to-day or regular management of the legal person’s activities, such as business management.
A person in the top management should be any natural person who ensures daily or regular management of the activities of a legal entity, such as business management, and who is also a member of the statutory body of a legal entity or a person in a similar position or represents a legal person in this body or is directly subordinate to the statutory body of the legal person or its member.
It will now be possible for several natural persons to be the beneficial owner, and these natural persons do not have to act in concert.
We consider it important to note that the current bill on the Registration of Beneficial Owners regulates that if a business corporation’s share is managed in a trust fund (domestic or foreign), the beneficial owner of this business corporation will be determined according to the rules for determining the beneficial owner of the business corporation. The beneficial owner of such a business corporation will not be any natural person who is the beneficial owner of the trust fund, but only a person who is the ultimate beneficiary of the business corporation or a person with the ultimate influence of such a business corporation. In our opinion, this adjustment is problematic due to insufficient registration of the beneficial owners of trust funds and their possible concealment.
Evidence of beneficial owners is not and should not be a public register. Thus, the bill moves the legal regulation of the register of beneficial owners, including the definition of the beneficial owner, from the Public Registers Act and the AML Act to a completely newly proposed Register of Beneficial Owners Act.
Obligation of registration
The beneficial owner, final beneficiary or person with ultimate influence will be obliged to provide the registrant with the necessary cooperation, including notification of the creation of his position.
The registrant will be required to obtain and record complete, accurate and current information about its beneficial owner or owners, as well as the steps taken to identify the beneficial owner in cases where the ultimate owner of the corporation is a senior person.
The registrant will also be obliged to ensure that the valid data on his beneficial owner of the legal arrangement corresponds to the actual state.
The registering person will be understood as a legal entity that has a beneficial owner, a trustee or a person in a similar position with a foreign trust fund of a legal arrangement.
Management, content and access to records
The records shall be kept by the court which has jurisdiction over the registration procedure. In addition to the notary, the court will also be the only one entitled to make the registration itself.
Although the Register of Beneficial Owners will not be a public register even after the transposition of the V. AML Directive, access to this register will be, at least in part, newly made available to the public. The Ministry of Justice will provide access to the register on its website, but the range of information available will vary for the public and interested parties.
The public should have access to information about the beneficial owner, such as name and surname, state of residence, year and month of birth, citizenship, or information on the reason for the position of the beneficial owner. The bill also envisages that in some cases minors may also be designated as beneficial owners, and therefore allows, in such a case, the data on the beneficial owner to not be published upon request.
Discrepancies in the records of beneficial owners
If a public authority considers that it has discovered an irregularity during its activities, it shall immediately notify the court having jurisdiction to register it. In such a case, the court shall invite the registrant to remedy or refute the irregularity and shall set a reasonable time limit for doing so. If the irregularity is not remedied, the court should initiate proceedings for the irregularity, which are usually decided without a hearing. No appeal shall lie against this decision. It is proposed that the court, together with the issuance of the order to initiate the irregularity proceedings, enter a note on the irregularity in the register of beneficial owners, recording in this note what the irregularity is and the date the irregularity proceedings were initiated. In irregularity proceedings, the irregularity may be either confirmed or disproved.
A major change compared to the current legislation will be the introduction of sanctions for breaches of the obligation to register the beneficial owner. The bill to the Act stipulates as a sanction the impossibility to pay a share in the benefit (profit) and also the impossibility to participate in the voting of the highest body of a business corporation, while the conditions for granting these sanctions are described in more detail below.
The amendment stipulates that if the beneficial owner of a business corporation is not entered in the Register of Beneficial Owners, this business corporation may not pay a share in the benefit to him, or to a legal person or legal arrangement of which he is also the beneficial owner.
Furthermore, a business corporation will not be allowed to pay a share of the benefit to a legal entity or legal arrangement that does not have any beneficial owner registered in the Register of Beneficial Owners. The right to a share in the profit or other owned resources, which as mentioned above will not be paid by the end of the accounting period in which it was decided to be paid, expires.
If the beneficial owner of a business corporation is not entered in the Register of Beneficial Owners, he will not be allowed to exercise voting rights or make decisions as its sole shareholder when deciding on the highest body of this business corporation himself or a legal person or one acting on behalf of a legal arrangement of which he is also the beneficial owner. Voting rights in a business corporation may not be exercised or decided by the legal entity, or a person acting on behalf of a legal arrangement, which does not have any beneficial owner registered in the Register of Beneficial Owners when deciding on the highest body.
It should also be possible to impose a fine of up to CZK 500,000 on:
- the registering person for failing to ensure the entry of any data in the Register of Beneficial Owners or for not entering the correct data, if the court deleted the incorrect data without compensation, or;
- the beneficial owner, the ultimate beneficiary, the ultimate person, and the person through whom the ultimate beneficiary may benefit or exercise his influence, for failing to provide the necessary cooperation in the registration of beneficial owners.
The bill deals in particular with a better definition of terms, clarification of the procedure for registration, automatic transcription, the procedure for detecting irregularities or possible entry of false information about the beneficial owner and the introduction of sanctions, both for not registering the beneficial owner and for not providing sufficient cooperation on the part of the beneficial owner or the final recipient.
The main benefit should therefore be easier understanding of the issue of registration of beneficial owners, preparation of the environment for a better course of registration in practice and ensuring the registration of beneficial owners due to the imminent sanctions in case of a violation of this obligation.
We will monitor the status of the legislative process for you and regularly inform you about its further development.
In the case of any questions concerning the issue of beneficial owners and their registration in light of the above and current legislation, we are at your disposal. Do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, junior lawyer – firstname.lastname@example.org
Mgr. Jakub Málek, partner – email@example.com
14. 08. 2020