A new Czech Act on the UBO Register has embarked on the journey from bill to law. It delivers changed definitions, public access to the data, and penalties.
Merely two years have passed since the keeping of records on ultimate beneficial owners has been incorporated into Czech law. Since 1 January 2018, all companies must determine their ultimate beneficial owner and have him or her entered into a special register kept with the register courts (in actual fact by the end of 2018).
Those who did so by the end of the first year after this obligation was introduced did not have to pay the court fee associated with this register entry. In spite of this ‘reward’, countless companies have yet to observe their statutory obligation, given that the law imposes no immediate penalty on those who do not reveal their ultimate beneficial owner. Delinquent companies do face certain indirect consequences of this breach of their obligation, e.g. in the form of an obstacle to participation in tender procedures for public contracts or to obtaining subsidies).
Ever since its promulgation, the rules on the UBO register have been subject to criticism. Detractors complained that European law (i.e., specifically, the Fourth AML Directive ) had been poorly implemented, that the definition of the ultimate beneficial owner is ambiguous and largely toothless, and that the new obligation cannot be effectively enforced.
In this sense, the need to implement the Fifth AML Directive provided the ideal opportunity to revise the current rules and pass new ones which the lawmakers secretly hope will be different and better.
What’s new under the Act on the UBO Register?
The new UBO register is being addressed by a separate new law – namely, the act on the keeping of records on ultimate beneficial owners, the bill for which is currently being discussed on the cabinet level. This spells the end for the undesirable multiplicity of the current rules: some matters were being addressed in the Act on Public Registers but others in the Czech AML Act .
Among the main objectives pursued by the said bill are improved transparency, more efficient measures to combat money laundering and the financing of terrorism, and the cutting of red tape.
The act on the keeping of records on ultimate beneficial owners – or Act on the UBO Register, for short – provides a new definition of the ultimate beneficial owner which is based on the substantive meaning of the term, as opposed to the mere fulfillment of a formal definition. In other words, going forward, the lawmaker wants economic realities to be taken into account.
The ultimate beneficial owner is a natural person who draws the ultimate benefit or exerts ultimate influence – i.e., the one who, in the last consequence, derives material advantage from the operations (or the divestment) of the legal entity, its management or its liquidation without having to pass on this advantage to someone else, or the one who exercises material influence over the manner in which the company runs its business or is organized.
The new bill contains complex rules for determining the identity of the UBO and who exerts ultimate influence; in so doing it also takes into account the phenomena of chaining and of branching of ownership participations. The ultimate beneficiary (and thus the ultimate owner) is primarily he or she who participates in the company’s profit to more than 25% or who holds more than 25% of the voting rights or capital share. If the ultimate beneficial owner cannot be determined or if it is found that ultimate influence is exerted by a legal entity which itself has no ultimate beneficial owner, then the fiction shall hold that each member of the top management of that legal entity is the ultimate beneficial owner.
The law also stipulates that certain entities do not have any ultimate beneficial owner by definition. Among them are the state, territorial self-governing entities, state-owned enterprises, political parties, religious communities, trade unions, home owners’ associations, etc.
The Act on the UBO Register, which is supposed to enter into force as at 1 December 2020, takes corporate governance into the third millennium in that it envisions the automatic reflection of Commercial Register data also in the UBO register e.g. in those cases in which the Commercial Register accounts for a single shareholder so that there can be no doubt as to the identity of the ultimate beneficial owner. This means that companies which have a single shareholder escape the hassle of having to enter their ultimate beneficial owner in yet another register for mere technical reasons.
Aside from Czech legal entities, the register will record also the ultimate owners of trust funds and other legal forms (including other than Czech ones!), as long as the fund manager is established in the Czech Republic or the fund is being administered from within the Czech Republic or is comprised of assets in the Czech Republic, etc. Our recommendation is for everyone who is involved in trust funds to pay special attention to the new rules.
Up until now, the UBO register has not been a public register, and this will continue to be the case. However, the bill anticipates internet-based access to the data in the UBO register for the general public. It should therefore be possible to obtain, to a limited degree, an extract (of the current data) from the UBO register, as well as a copy of the records (i.e., both current data and historical data).
As we have seen, recording the ultimate beneficial owner will turn from mere administrative hassle which can be ignored without serious consequence into a substantial reporting duty. Companies which will continue to evade it expose themselves to the risk of fines and jeopardize the smooth functioning of their corporate governance. We will continue to monitor the fate of the bill and timely inform our clients if and when it is written into law, and about its final wording.
To be continued (Consequences of failure to enter the UBO).
Bill for an Act on an UBO Register and its explanatory memorandum