New Act No. 37/2021 Sb. on the Register of Beneficial Owners (“ARBO”) will enter into force on 1 June 2021 in the Czech Republic. In contrast to the current legislation, the ARBO introduces significant sanctions for a breach of the obligations it imposes, including fines up to CZK 500,000 or invalidation of voting rights and the right to dividends.
As the effective date of the ARBO is inexorably drawing near, we highlight below some of the most important changes it will introduce so that you can prepare sufficiently in advance.
In 2017, an amendment to the Public Registers Act entered into force, transposing AML Directive IV, and introducing the duty of each of the persons listed in the public register under that Act to disclose its beneficial owner (based on the current definition, in simple words, a natural person who is actually or legally able to exert controlling influence over the legal entity) in the new register of beneficial owners of legal entities (“RBO”).
Legal entities were obliged to register their beneficial owners by the end of 2018. Failing to do so, they have been acting in violation of law since 1 January 2019.
Neither the Public Registers Act, nor the Anti-Money Laundering Act, nor the Companies Act, nor any other laws currently impose any direct sanctions for a breach of this duty. An indirect sanction may be represented by the more complicated procedure in the course of the customer due diligence, where the company has to identify its beneficial owner ad hoc, which is more complicated than simply referring to previous registration in the RBO.
Shortly after the transposition of the AML Directive IV into the Czech legislation, the European Parliament adopted AML Directive V in 2018, introducing numerous changes, in particular with regard to the perception of the national registers / lists / records of beneficial owners.
The most significant changes introduced by the directive include:
- the obligation of each Member State to ensure public access to the data recorded in the national registers of beneficial owners; and
- the obligation of the Member States to introduce significant sanctions for violations of the registration duty.
An obligation was imposed on the EU Member States to transpose AML Directive V into their respective national legislations by 10 January 2020.
Act on the Register of Beneficial Owners
The legislature has now pulled the rules for keeping records of beneficial owners out from the Public Registers Act into the separate ARBO. At the same time, the definition of beneficial owner has been transferred to the ARBO. Below please find a summary of the most significant related changes:
Identification of the Beneficial Owner
The ARBO slightly modifies the definition of the beneficial owner – the beneficial owner is any natural person who is the ultimate beneficiary or who has ultimate control (preserving the 25% threshold of the distributed benefits and of the voting rights – both directly and indirectly).
A significant change to the previous regulation involves the identification of a surrogate beneficial owner in cases where the beneficial owner cannot be determined in one of the envisaged methods (i.e., applying the threshold of distributed benefit or of voting rights). In this case, the legislation currently in force stipulates the obligation to register the director(s) of the Czech legal entity (i.e., directly the legal entity that identifies and registers its beneficial owner).
The ARBO, however, introduces the obligation in this case to identify the director(s) of the ultimate parent company rather than the director(s) of the legal entity identifying and registering its beneficial owner. Companies that currently have their directors registered as their beneficial owners and are a part of a more complex corporate structure thus should double check whether they are not subject to the above-mentioned conditions and, as the case may be, re-register their current beneficial owners.
In addition, the ARBO contains an exhaustive list of the types of legal entities which do not have a beneficial owner. Those mostly public entities are not recorded in the register of beneficial owners at all. Legal entities directly owned by entities with no beneficial owner will identify their director(s) as their beneficial owner(s).
The Nature and Properties of the Register
Some of the information entered in the register of beneficial owners will be publicly accessible (the full name, country of residence, the year and month of birth, citizenship, and the reason of the status of beneficial owner).
Nevertheless, the ARBO takes into account that, in some cases, beneficial owners may be minors; in such cases, the ARBO allows an exemption from the publication duty in respect of such individuals – i.e., disabling public access to their data, which is not granted automatically but instead needs to be applied for. Entry in the register of beneficial owners will be subject to administrative proceedings, provided that the application concerning business companies and similar legal arrangements must be sent electronically.
In cases where the identity of the company’s beneficial owner(s) clearly follows from the information entered in the Commercial Register (e.g., members of a limited liability company who are natural persons and hold an interest in excess of 25%; or a joint-stock company with a single shareholder identified in the commercial register), the court will automatically carry the information over to the RBO.
The currently prevailing practice is that the court will, as a rule, register beneficial owners merely on the basis of an affidavit issued by the company, in which it thoroughly describes its ownership structure and the ensuing information regarding the beneficial owner.
The ARBO introduces a non-exhaustive list of corporate documents a company may produce to evidence the status of its beneficial owner. This list also contains the above-mentioned affidavit, which will henceforth only be admissible in cases where the status of beneficial owner cannot be evidenced otherwise.
Discrepancies and Sanctions
If a public authority or the obligated person under the Anti-Money Laundering Act ascertain a discrepancy in the due course of their activities, they are required to notify the competent registration court. The registration court will then publish a discrepancy note in the RBO and will ask the person concerned to make good the discrepancy within a reasonable period set by the registration court.
If the discrepancy is not rectified, the court will initiate a discrepancy proceeding. In the course of such proceeding, the discrepancy may either be confirmed, whereas this fact will be recorded in the RBO and the court will subsequently rectify the incorrect information, or the recorded information will be completely erased if the identity of the beneficial owners fails to be ascertained in the course of the proceeding; or, if the outcome of the proceeding is that the beneficial owner was correctly registered, the court will remove the discrepancy note.
AML Directive V imposes on the Member States the duty to introduce significant sanctions in the event of failure to make an entry in the RBO, or for making an incorrect entry. In addition to public-law sanctions (for failure to make an entry as well as for failure to enter correct data after deletion of the incorrect data in connection with the discrepancy proceeding, a fine up to CZK 500,000 to the registering person and up to CZK 500,000 to the beneficial owner, ultimate beneficiary and the person exercising ultimate control for failure to provide assistance in making an entry in the RBO), the ARBO also introduces private-law sanctions. The latter include invalidation of voting rights and of the right to receive distributions and apply to beneficial owners not registered in the RBO and/or to shareholders of a legal entity with no properly registered beneficial owner.
At present, this topic strongly resonates with the professional public due in particular to the fact that the ARBO applies to virtually all legal entities. Consequently, we are preparing a series of more detailed articles specifically dedicated to:
- identification of the beneficial owner under the ARBO;
- nature of the register of beneficial owners, and registration procedure;
- consequences of incorrect identification and registration of beneficial owner.
Having in mind that the effective date of the new statute regulating the register of beneficial owners is literally around the corner, we strongly suggest that you verify whether your company complies with all the statutory requirements.
By Ondrej Florian, Partner, and Alexandra Parnaiova, Associate, Havel & Partners