A new and simpler definition of a beneficial owner is to be introduced this October. Its implementation is conditional for the provision of European subsidies to the Czech Republic. Failure to register a beneficial owner in the register may result in prohibition to pay any benefits to the respective person.
Rationale for the amendment to Act No. 37/2021 Coll., on the Register of Beneficial Owners (“ARBO”)
The European Commission has started a number of infringement proceedings against the Czech Republic for breach of its obligations under the founding treaties of the European Union. One of these is for the incorrect implementation of Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (“AMLD V”). This Directive is implemented in the Czech legal system, inter alia, in ARBO. Thus, Act No. 245/2022 Coll., amending ARBO (“Amendment to ARBO”) that makes ARBO compliant with the AMLD V, has recently been published in the Collection of Laws.
Interestingly, the correction of the implementation of AMLD V has become a condition for the submission of the Czech Republic’s first application for drawing funds from the EU for the National Recovery Plan. It was, therefore, essential that the Amendment to ARBO be approved as soon as possible. The Amendment to ARBO will be effective from 1 October 2022.
This article intends to introduce the Amendment to ARBO and suggest the next possible steps for its target recipients, i.e., virtually all business corporations.
Main changes in the Amendment to ARBO
The primary reason for the Amendment to ARBO is that the European Commission is of the opinion that ARBO does not comply with the wording of AMLD V in the following cases:
- The definition of a “beneficial owner”, in particular, the redundancy of the concept of an ultimate beneficiary;
- The lack of identification of beneficial owners for specific types of private legal entities, in particular the existing exceptions under Section 7 of the current version of ARBO.
These areas are also the subject of the Amendment to ARBO and will therefore be analysed further in this article. The Amendment to ARBO also regulates some related areas, for example, those connected to the functioning of the Beneficial Owners Register (“Register”), which, however, are rather partial in scope.
The Amendment to ARBO will also indirectly affect, for example, Act No. 253/2008 Coll., on Selected Measures against the Legalisation of the Proceeds of Crime and Financing of Terrorism, as amended (“AML Act”), where it is linked to the definition of a beneficial owner (e.g., Section 9 of the AML Act).
New definition of a beneficial owner
A crucial element of the Amendment to ARBO is the abolition of the binary definition of a beneficial owner through the concepts of an ultimate beneficiary and a person with ultimate control, which has fundamentally simplified the definition of a beneficial owner. Now, a beneficial owner will be any natural person who ultimately owns or controls a legal entity or legal arrangement. Other terms are amended in line with this change.
The key concepts therefore include the terms “ownership” and “control”, which, according to the explanatory memorandum, must be interpreted extensively and rather in layman’s terms as “mastery” over a legal entity, and thus not only in their legal meanings.
The Amendment to ARBO then comprehensively changes in Section 4 the criteria for determining which natural person owns or controls a specific corporation, adopting the wording of AMLD V. Unlike the current wording of ARBO, the new wording is not merely a “pointing to the person with ultimate control” but an unconditional indication that the respective person is the actual beneficial owner. The new definition includes both hard criteria (25% voting interest, etc.) and soft criteria – the exercise of decisive control (which is then further developed) in the corporation by other means. The act sets out these criteria alternatively, it is thus sufficient to meet at least one of them.
Limitation of exemptions
Until now, Section 7 of the current version of ARBO contained an exemption according to which a number of categories of entities did not have a beneficial owner. Typically, these included the state and local self-government units [municipalities (in Czech: obce) and regions (in Czech: kraje)] and entities owned or established by them, such as state-owned enterprises (in Czech: státní podnik), schools, or public research institutions. At the same time, however, other entities such as associations of homeowners (in Czech: společenství vlasníků jednotek) or political parties were also included. The Amendment to ARBO limits this exemption to only two categories of entities. The exemption is to apply in particular to the state and local self-government units and entities financed or decisively controlled by them, and a rebuttable presumption of the absence of a beneficial owner is provided e.g., for state-owned enterprises. In the case of business corporations, direct or indirect ownership of shares in them by the state or a local self-government unit (i.e., by a region or a municipality) is required. Thus, a number of categories of entities – associations of homeowners, hunting associations, political parties, churches, or trade unions – might have potentially been excluded from the exemption, unless they meet the condition of financing or decisive control of the state or local self-government unit.
Although the Amendment to ARBO is not very extensive, it affects important areas that require attention.
The good news is that the abolition of the concept of an ultimate beneficiary, a person with ultimate control, and other similar terminological changes will not imply an obligation to change the existing entry in the Register for most of the registering entities, as within one month of the Amendment to ARBO coming into force, the terminology of the entries in the Register will be automatically updated in this respect.
If entities had a person registered as the beneficial owner in the Register before the Amendment to ARBO came into effect, who will no longer be considered the beneficial owner under the Amendment to ARBO, they will not be obliged to delete that person’s registration from the Register, as this registration will not be taken into account by law and such outdated information will not be considered a discrepancy. However, nothing prevents the deletion of such a person from being carried out on application or request.
In general, entities that have fulfilled their registration obligation under the current legislation, will have a period of six months to adjust their data to be compliant with the Amendment to ARBO, during which they will not be affected by the negative consequences of discrepancies in the Register. In practice, however, the obligation to update the data in the Register should only apply to those existing entries, which are incomplete in light of the new regulation, i.e., cases where the beneficial owner is not entered in the Register, although according to the new regulation they should be.
Entities that did not have a beneficial owner before the Amendment to ARBO came into force (e.g., associations of homeowners, political parties, trade unions) are also obliged to ensure that the data in the Register are consistent with the Amendment to ARBO within six months of the Amendment to ARBO coming into force. Here too, the Amendment to ARBO provides for automatic transcription of the necessary information from the relevant registers.
In any case, we recommend checking whether the existing entry in the Register after the automatic adjustments or the newly made automatic transcription of data from other registers correspond to reality and whether the number of beneficial owners of a particular entity, as identified and registered under the current regulation, has not changed (expanded or narrowed) as a result of the change in the definition of a beneficial owner.
It is necessary to examine the impact of the Amendment to ARBO on your company in a timely manner
In relation to the Amendment to ARBO, it is therefore necessary to consider how your company has been affected by the change in definitions, both with regard to possible changes in the persons registered in the Register and to the information required by the obliged persons under the AML Act (typically banks), which in many cases are obliged to identify and verify the identity of the beneficial owner of their client, and to further check it, e.g., in terms of the political exposure of persons or presence on sanctions lists.
We conclude this article by reminding you that failure to register a beneficial owner in the Register may result in prohibition to pay any benefit to the respective person.