At the beginning of February 2021, Act No. 37/2021 Coll., on Registration of Beneficial Owners was published in the Collection of Laws which transposes – albeit with a considerable delay after the deadline which was more than one year ago – requirements of the EU law arising from the fifth generation of the AML Directive. With effect from 1 June, the new act will replace the existing legislation which has been so far contained in Act No. 304/2013 Coll. (Act on Public Registers) and Act No. 253/2008 Coll. (Anti-Money Laundering Act). This article aims to draw attention to some of the principal news that should be noted by Czech corporate entities and trust funds. Especially since the new act imposes considerable sanctions for the failure to meet the obligations. We will focus on the entities most affected by the law, i.e. limited liability companies and joint stock companies.
Who is the beneficial owner?
The new act does not change the basic principle that the beneficial owner is always an individual who either controls the company (person with ultimate control) or draws a qualified beneficial interest exceeding 25% (ultimate recipient). The act emphasises that there may be several persons in the position of beneficial owner which may be a frequent situation primarily in case of ultimate recipients. Companies with an uneven setting of beneficial interests will need to make special efforts, for example where certain shares will yield a higher profit share and others will produce a higher share in other equity resources, or in the event of an issue of tracking shares which carry only a right for the share in profit generated by a sub-division of the company.
In any case, the primary feature of the beneficial owner is the finality of his/her position: a person with ultimate control makes decisions himself/herself without taking into account instructions of his/her superiors, and the ultimate recipient does not pass on the obtained benefit. From the act’s perspective, it is not decisive whether the benefits are obtained and the ultimate control exercised directly or indirectly (usually through a structure of other corporate entities). In this regard, the explanatory memorandum is very instructive as it shows, in a clear and structured manner, typical corporate structures in which the ultimate control or receipt of benefits converges in one specific person positioned higher by several levels.
The obligation of the registering entity to determine its beneficial owner
The primary obligation to determine and register its beneficial owner is the obligation of the registering entity under Section 9 of the Act on Registration of Beneficial Owners, i.e. the entity whose beneficial owner is to be registered. The responsibility for meeting the obligation is the responsibility of its statutory body (statutory executives, members of the Board of Directors) who, under Section 5 (1) of the Act on Registration of Beneficial Owners, must “make any efforts that may be reasonably required from them.” As such, a statutory executive may be left in doubt as to what level of activity (and often assertiveness) is expected from them to meet their obligation.
A response is offered both by the explanatory memorandum and the older case-law relating to the obtaining of information for purposes of the preparation of the related party report. Statutory executives of the registering entity should surely go through available online sources such as foreign registers of companies (including paid ones) and annual reports of companies that are on higher levels in the group. Additionally, they should use their contacts in the group, notify them of the obligation to cooperate under Section 10 of the Act on Registration of Beneficial Owners, ask them relevant questions and, if necessary, remind them once or twice. However, it is not necessary to initiate any “extensive investigative activities”, hire private detectives, etc.
Only if these efforts are unsuccessful, is it possible to record replacement beneficial owners who are members of the statutory bodies and possibly subordinate managers (in both cases only those who are on executive positions). The registering person however must not make his/her work easier by doing this; he/she must make the above described efforts to determine the beneficial owner and Section 8 of the Act on Registration of Beneficial Owners imposes an obligation to record and archive the steps that he/she made in this regard.
Records of beneficial owners: registration and data publicity
As soon as the company gets it straight whom it will record as the beneficial owner, it will have several possibilities of how to make the record. Petitions for registration will be dealt with by courts holding registers of companies as before, and also by notaries (newly without limitations). Relating legislation is still in preparation in mid-February 2021, however, the intention of the lawmaker is to make the registration through the notary significantly less expensive and, as a consequence, direct registering entities to notaries. The third possibility is an automatic transcription which does not require an activity on the part of the registering entity and will be relevant and welcome primarily in companies with simple and transparent ownership structure that will be recognisable from the Commercial Register.
It is worth mentioning that some new information will be registered in the records, primarily the structure of relationships. It is possible to record it (optionally) already now, however, not many companies have done so. These companies, although they have met their registration obligation according to the existing legislation, will have to add the information registered in the records of beneficial owners. Further news is the fact that part of the information registered in the records will be publicly accessible. Although the scope of the information on the beneficial owner that will be available to the general public is relatively limited (invisible will be, among others, an exact date of birth, address and description of the structure of relations leading to the beneficial owner), still many beneficial owners may be unpleasantly surprised as they were reassured several years ago that the records would be non-public.
Probably the biggest change brought by the new legislation are sanctions for the failure to meet the obligations. Those will be, starting from 1 June 2021, in line with the requirements of the directive, indeed “effective and discouraging” and their mapping would require significantly more space than available in this article.
What are the new consequences of non-compliance?
- fine up to CZK 500,000
- suspension of voting rights (or the right to decide asthe sole shareholder); ban on payment of dividendsand other equity resources; extinction of the right to adividend and share of other equity resources
- sanctioning members of the executive body as aresult of a breach of the due managerial care (e.g. theobligation to compensate for damage from an unlawfullypaid dividend)
- unenforceability of rights and obligations arising fromlegal acts veiling the person of the beneficial owner
In addition to usual public law sanctions (primarily in the form of a fine up to CZK 500,000), the act lays down unpleasant sanctions under private law, be it suspension of voting rights at the general meeting (or in the decision making of the sole owner) or suspension of the right for payment of the benefit share. Companies that fail to meet their obligation in the identification and registration of the beneficial owner will stay in uncertainty whether the resolution of their general meeting or the sole owner will not be challenged for invalidity and whether the correctness of the profit payment or payment of other own sources will not be contested.
Finally, we consider it important to note a new rule defined in Section 52 of the Act on Registration of Beneficial Owners under which the rights and obligations from legal activities concealing the beneficial owner cannot be asserted. This provision aims to prevent the beneficial owner from hiding behind a nominee person, typically professional providers of “nominee” services. The act explicitly specifies that the unenforceability will prevail regardless of what legal system such legal activities adhere to. Beneficial owners who are keen to stay anonymous, will have an even more difficult position.
Companies with a simple and well organised ownership structure (typically with one owner who is a Czech individual) will see a simplification in the form of an automatic transcription of the information from the Register of Companies. On the contrary, companies that are part of a wider group, especially those whose structure spreads to foreign jurisdictions will have to be cautious. For them, it will be necessary to actively determine and record the beneficial owner, and the failure to meet this obligations may have unpleasant consequences.
Those registering persons that were diligent two years ago and met their obligations in time, already according to the current legislation, will have another 6 months to meet the requirements of the new act, i.e. they will have to align the information registered in the records with the new act by 1 December 2021. Other persons will have to meet their obligations without any delays after the new act takes effect. This requirement is gaining urgency by the sole fact that many companies organise general meetings in June; it would be unfortunate to have to deal with the issue whether certain significant shareholders may or may not exercise their voting rights.