The beneficial owner is taking on a new form

The beneficial owner is taking on a new form

Filip Novák | 09. 11. 2020

On Monday, June 1st, 2020, the Czech Government passed a draft bill on Registration of Beneficial Owners (Zákon o evidenci skutečných majitelů, hereinafter only the „ZESM“). Provisions related to the beneficial owners of legal entities are therefore removed, contrary to the current legislation, from Act No. 253/2008 Coll., on Selected Measures Against Money Laundering and Terrorist Financing (hereinafter only the “AML Act“) [1] and from Act No. 304/2013 Coll., on Public Registers (hereinafter only the „ZVR“) [2] and will be newly guided in a separate legal instrument.

Since its adoption, the current legal regulation guiding the register of beneficial owners has been frequently criticized, especially for its failure to sufficiently transpose requirements of the EU acquis. Most experts criticize primarily the rather ambiguous and ineffective definition of the term beneficial owner, but also the absence of enforceability of the newly stipulated obligations. [3] However, this will change relatively soon as the legislators have been working on a transposition to the Czech legislation of selected new requirements concerning recordkeeping of beneficial owners under the amending 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 purposes of money laundering or terrorist financing and Directives 2009/138/EC and 2013/36/EU (hereinafter only the 5th AML Directive).

Provisions of the new bill respond more adequately to the need for more complex legislative and systemic changes. Moreover, the bill reflects on numerous new rules as well as the specifics of registration of beneficial owners. It introduces a more accurate definition of the beneficial owner, regulates the type and scope of data pertaining to beneficial owners to be kept in the register, guides the registration process, the automatic transfer of selected data from the public register [4], and amendment or supply of incorrect or missing data in the register and access (including public administration bodies) to individual data on beneficial owners. The bill also regulates relatively strict private law sanctions (e.g. discontinued payment of profits) and public law sanctions (up to CZK 500,000 fine) for discrepancies in the records.

The new comprehensive and complex legal regulation of the register of beneficial owners can be perceived as a significant move towards increased transparency. [5] The bill emphasizes transparency of the entity´s organizational structure and its personnel, i.e. management, recipients of benefits, natural persons in control of the entity, resp. recipients of profit; by introducing these requirements, the bill strives to deter potential perpetrators of money laundering and terrorist financing. There is yet another significant step forward – the register of beneficial owners is becoming an even more useful tool in support of responsible bodies´ compliance under the AML Act, particularly in respect of the “know your customer” policy [6]. Finally, the bill opens the data to the public [7] thus reducing costs associated with administrative tasks required by the current guiding registration of the beneficial owner, which are time-consuming and expensive and cause burden not only businesses and the public at large, but also the registering courts.

Regardless of potential weak points or imperfections of the new bill, which were publicly debated shortly before the government approved of its draft [8], we can perceive the new regulation as a positive and promising step towards increased business transparency and enhanced compliance with relevant international standards.[9]

On June 8th, the draft bill was submitted to the Chamber of Deputies as Ref No. 886/0. For more information on the approval process, see here.

In the Beneficial owner section, we cover the aspect of beneficial ownership in detail both from the Czech point of view as well as internationally. We wish to compare the proposed Czech norm with similar legislation abroad and, simultaneously, describe the best practice.

[1] The beneficial owner is defined in Section 4(4) of the AML Act. The definition derives from the material concept of beneficial ownership. The beneficial owner is: “A natural person who has, in fact or in law, the possibility of exercising, directly or indirectly, a decisive influence over a legal person, a trust or any other legal arrangement without legal personality. Furthermore, Section 29b) of the AML Act lays down obligations of legal entities (and trustees) to record and maintain updated records to identify as well as verify the identity of their beneficial owner, including data on facts that establish the beneficial owner´s status.

[2] Part Five, Section 118b) et seq. of the Act on Public Registers of Legal and Natural Persons stipulates the current system of beneficial owners´ registration. The actual register of data on beneficial owners is a public administration´s information database in which the authorities enter data on beneficial owners which are defined by law. The authorities enter data on beneficial owners (1) of legal entities registered in one of the public registers of legal and natural persons as well as beneficial owners (2) of trust funds registered in the register of trust funds. The database is kept by Registration courts.

[3] Under the current legislation, legal entities (trustees) bear sole and exclusive responsibility for data complexity, accuracy, and updates. The law doesn’t stipulate any sanctions for non-compliance with the statutory obligations.

[4] The new Bill reduces the administrative burden of entities concerned by introducing a so-called automatic transfer of data from public registers. It will be no longer necessary to register the beneficial owner of a legal entity, which is already known, beyond a reasonable doubt, from the public register.

[5] See point 4  of the Preamble to the 5th AML Directive: „The integrity of the Union financial system is dependent on the transparency of corporate and other legal entities, trusts and similar legal arrangements. This Directive aims not only to detect and investigate money laundering but also to prevent it from occurring. Enhancing transparency could be a powerful deterrent.“

[6] The register intends to reach beyond simple registration of the beneficial owner; it should serve as a reference framework helping to detect suspicious transactions related to cases where there is a discrepancy between the data kept in the records and established by the obliged person.

[7] With the new regulation, the user will be able to enter the identification data of any legal entity and subsequently see information on its beneficial owner. This will give users access to information necessary to analyze potential conflicts of interest or credibility of natural persons acting on behalf of a particular legal entity. Screening via identification data of natural persons will be, however, possible only for selected public authorities.

[8] See the controversies concerning changes and interpretation of the provision guiding beneficial ownership of trust funds, which was added to the amendment after the end of the interagency round of comments close to the end of 2019.

[9] The Czech Republic is a member of the Committee of Experts on the Evaluation of Anti-Money Laundering and Terrorist Financing Measures (MONEYVAL), which supervises Member States´ systems to combat money laundering and terrorist financing and oversees compliance with relevant international standards in this field.

Filip Novák

Filip Novák specializes in capital markets, fintech, compliance and money laundering prevention. In the area of capital markets, it focuses on the legal and regulatory aspects of the provision of financial services and collective investment, the supply of securities and admission to trading on public markets. In the area of fintech, compliance and money laundering prevention, it focuses primarily on crowdfunding, wealthtech, financial institution compliance and AML threats associated with cryptoactive activities and the use of new technologies. He currently works at the CNB as an expert in the field of financial market regulation and international cooperation. Prior to joining the CNB, he held the position of Head of Compliance and Legal Department of a Licensed Securities Dealer and previously at the law firm HAVEL & PARTNERS.