Records of beneficial owners and significant new sanctions
There will be changes to the records of beneficial owners in the spring of 2021. The new Act No. 37/2021 Coll., on records of beneficial owners was published in the Collection of Laws and should take effect on 1 June 2021. We would like to acquaint you with some of the new rules in this legislation in this issue of News.
In addition to a stricter definition of the term ‘beneficial owner’ and related definitions, the new law on records of beneficial owners (hereinafter only the “Registration Act”) will also regulate in more detail the proceedings for registration in the records of beneficial owners, and will in particular introduce completely new sanctions for failure to comply with the obligation to perform proper registration in the records of beneficial owners. These new sanctions will comprise, on the one hand, the possibility of a financial fine for a missing or incorrect record in the records of beneficial owners, but also a restriction or prohibition on the payment of a profit share and a restriction on the exercise of voting rights for those members not recorded as beneficial owners even though they are.
The Registration Act was adopted in connection with the requirements of the 5th EU AML Directive. These are intended to improve the transparency and efficiency of the legal regulation of records of beneficial owners. The Registration Act therefore imposes on ‘registrants’ (basically meaning every legal person with a registered office in the Czech Republic and the trustees of trust funds) the obligation to ensure that all natural persons who meet the definition of beneficial owner are registered in the records of beneficial owners.
According to the new definition, a beneficial owner is any natural person who is an ‘end beneficiary’ or person with final influence. The Registration Act then defines in detail these new terms for various types of legal person. For example:
- an end beneficiary of a business corporation (meaning an enterprise) is any person with a direct or indirect right to a share in the profit, other own resources, or the liquidation balance of a business corporation of over 25%, and who does not pass this share onto others;
- a person with final influence in a business corporation is any natural person who is a controlling person pursuant to the Business Corporations Act.
If it is not possible to determine any beneficial owner even after the registrant take all efforts that can reasonably be required of them (while the performance of such steps must be demonstrably documented), every person in the senior management of the corporation will be considered a beneficial owner.
Registration proceedings, public access to records, and inconsistencies in records
The new Registration Act also newly regulates the proceedings for registration in the records of beneficial owners performed by register courts. There will now be partial public access to records of beneficial owners. This means that anybody will be able to obtain a partial extract from the records showing information about the beneficial owner.
The Registration Act also introduces the institute of ‘inconsistencies in the records of beneficial owners and court proceedings on inconsistencies. This is intended to enable the register court to effectively enforce the obligation to register. New obligations in relation to inconsistencies are also imposed on obligated persons pursuant to the Act on Selected Measures Against the Legitimisation of the Proceeds of Crime and Financing of Terrorism (e.g. financial institutions like banks and insurance companies, but also e.g. auditors, lawyers, notaries, tax advisers and others) who will, in some cases, be obliged to notify their clients – and potentially also the register court – of inconsistencies.
Significant new sanctions – impacts on the payment of profit and corporate decisions
Sanctions for failure to comply with the obligation to perform proper registration in the records of beneficial owners will also undergo significant changes compared with the current legislation.
In accordance with the requirements of the 5th AML Directive, sanctions of up to CZK 500 000 will be introduced for infractions. These can be imposed both on the registrant (e.g. a business company) but also on its beneficial owner, end beneficiary or e.g. person with final influence, if they do not provide the necessary cooperation to the registrant.
The introduction of sanctions impacting the internal decision-making of a business corporation is completely revolutionary
If a beneficial owner of a business corporation is not registered in the records of beneficial owners, the business corporation may not pay them a share of the profit. Nor may it pay this share to a different legal person (e.g. a parent company) where they are also a beneficial owner. The same applies if the business corporation does not have any beneficial owner recorded in the records of beneficial owners. The payment of a share of the profit in violation of this prohibition would represent, on the part of the statutory bodies of that company, a breach of their obligations and could establish their personal obligation to compensate the company.
Similarly, if the beneficial owner of a business corporation is not recorded in the records of beneficial owners, they may not exercise voting rights during decision-making by the general meeting of that business corporation or make decisions as its sole member. Decisions taken in breach of this prohibition would be invalid, and would need to be enforced at a court of law through a procedure pursuant to the Business Corporations Act.
These latter sanctions (restrictions or prohibition on the payment of a share in the profit and restrictions on voting rights) represent an unprecedented and significant intervention through the public law regulation of records of beneficial owners in the internal relations of legal persons, in particular business corporations.
For the above reasons, we recommend in particular that all statutory bodies of business companies and also members do not underestimate their preparations for the Registration Act taking effect in the coming months. It is in the interest of companies and their beneficial owners to supplement any missing or incomplete records in the records of beneficial owners as soon as possible.
If you have any queries or need to adapt to the new legislation, we will of course be happy to provide you with our professional support.