Current developments in preventing the legalisation of proceeds from crime and terrorist financing

After several amendments in previous years related mainly to the implementation of the so-called 4^th AML Directive (as a result of which, for example, the requirement for keeping records of the beneficial owners of legal persons was introduced), the most topical issue as well as challenge is the implementation of the so-called 5^th AML Directive, which all EU Member States should implement by 10 June 2020. In the Czech Republic, compliance with the EU regulations should be achieved primarily by the amendment to the AML Act (and some other acts, e.g. the Gambling Act) and the passage of a new act on the registration of beneficial owners. However, it is already clear that this deadline will not be met, as on 10 January 2020, both legislative proposals were still in the legislative process.

Prevention of the legalisation of proceeds of crime and terrorist financing in real estate

For the real estate area, the most fundamental change is the adjustment of the group of the so-called obliged entities within the meaning of the AML Act, i.e. its extension, which should reflect the theoretical higher risk of the misuse of certain professions or real estate areas for the legalisation of proceeds of crime and terrorist financing.

The AML Act exhaustively defines the group of the entities that have an obligation to comply with this act and on which it imposes various duties in combatting the legalisation of proceeds of crime and terrorist financing. In contrast to the current version of the AML Act, which includes among the obliged entities the persons authorised to trade in real estate or act as a real estate agent, the obliged entities will newly include (inter alia) persons who buy or sell immovable properties (within their business activity) and perform the activities of a real estate agent within the meaning of the Act on Real Estate Agents (which is currently in the legislative process).

The amendment to this provision of the AML Act thus terminologically reflects the bill on real estate agents (the obliged entities will continue to include, for example, a developer selling real estate), but above all it practically extends the scope of the obliged entities to include persons acting as agents in the rental of real estate. However, this extension will be limited by the volume of payments in order to avoid a disproportionate increase in the number of obliged entities. Therefore, when mediating the rental of real estate, real estate agents will only be obliged if they are to mediate a rental with a monthly payment exceeding EUR 10,000.

Under the new legislation, the obliged entities will include agents renting warehouses, offices or business premises, including service companies performing the function of an agent within a holding company (provided that the amount of the monthly payment exceeds the specified limit).

Consequences for entities operating in the real estate segment

In the event that a person becomes an obliged entity within the meaning of the AML Act, this person will have to fulfil the specific obligations laid down by the AML Act when carrying out transactions and in contractual relationships with partners in order to prevent the legalisation of proceeds from crime and terrorist financing.

The primary obligation in preventing the legalisation of proceeds from crime and terrorist financing is to carry out specific identification and check of the client by obliged entities. In the event that the conditions of the AML Act are met, the obliged entities must, before performing a transaction or establishing a business relationship, identify the client or, where applicable, a natural person acting on behalf of a legal person, usually in the physical presence of the client (i.e. “face to face” even if the AML Act allows the use of certain alternative ways of identifying the client remotely). As part of the identification under the AML Act, the obliged entity shall first and foremost record and verify (i) identification data, (ii) identity card data and (iii) the client’s appearance when compared to the photograph on the identification card.

In addition to the identification and verification of this information, the obliged entity will have to verify, within the client’s identification, that the client (or, where applicable, the natural person acting on behalf of the legal person, the beneficial owner of the legal person or any other person in the ownership or management structure of the legal person) is not a politically exposed person or person against whom the Czech Republic applies international sanctions under the Act on the Implementation of International Sanctions. In cases defined by the AML Act, the obligation to carry out a specific client check is added to the obligation to identify the client which (to the extent necessary to assess the potential risk of legalising the proceeds of crime and terrorist financing) includes especially (i) obtaining and evaluating information on the purpose and intended nature of the transaction or business relationship, (ii) identifying the beneficial owner and ownership and management structure of the client (if the client is a legal person) and (iii) reviewing the sources of money or other assets covered by the transaction or business relationship.

Newly, the AML Act should also regulate the so-called strong customer authentication and check, which will apply in the event of increased risk of the legalisation of proceeds from crime and terrorist financing. Such a case will be, for example, a business relationship with a politically exposed person or a client established in a high-risk third country, which in practice often occurs when selling residential real estate.

Another novelty for the obliged entities will be the obligation to designate a member of the statutory body responsible for carrying out the obligations arising from the AML Act, whereby, as part of the strong customer authentication and check, the statutory body (or the person entrusted by the statutory body with management in the area of measures against the legalisation of proceeds from crime and terrorist financing) will have to agree to enter into a business relationship with the client to which the strong customer authentication and check will apply.

Naturally, the practical consequences related to the fulfilment of the specific obligations laid down by the AML Act are also the economic impacts comprising e.g. the cost of establishing systems for the recognition of suspicious transactions or the allocation of the capacity of certain employees to fulfil their obligations related to the prevention of the legalisation of proceeds of crime and terrorist financing. The extreme economic consequence may be the financial impact of penalty if a state authority discovers misconduct on the part of the obliged entity in its control activities, as a result of which it will impose a pecuniary sanction on this entity.

Imminent sanctions on entities operating in the real estate segment

Although the fulfilment of the obligations laid down by the AML Act is practically and economically demanding, all persons that may be considered obliged entities within the meaning of the AML Act must perform careful and proper identification and check of their clients, as well as ensure the fulfilment of other obligations laid down by the AML Act (e.g. regularly provide training for their employees or cooperating persons) as in the event of non-compliance with these obligations, the obliged entities may be subject to substantial sanctions. In addition to extending the AML regulation to a wider range of entities, there is a clear development of the extent of sanctions that may be imposed on obliged entities, not only in terms of raising the upper limit of financial sanctions (currently up to tens of millions of CZK), but also in the expansion of the types of penalties that can be imposed on them (as a last resort, there is also a risk of withdrawal of business authorisations).