Recently, not only in the media, we have been hearing about the need to register the beneficial owners of legal entities. Even professions such as auditors, for example, focus on this fact in their assurance work to determine whether or not the legal entity has/ has not complied with the related statutory obligations. In today’s article we will therefore introduce this topic.

What do you mean by the Register of Beneficial Owners?

The Register of Beneficial Owners is an information system that is maintained by the registration courts. The register was established by Act No. 37/2021 Coll., on the registration of beneficial owners.

Beneficial owner means any natural person who owns or controls a legal entity. The register of beneficial owners shows if this is a direct or indirect owner and also if the owner is identified as the material or formal beneficial owner.

The beneficial owner is indirect if there is one or more intermediate links (persons) between him and the registering person. His position is established indirectly, i.e. he is, for example, a shareholder of a company, which is a shareholder of the registering person. If a person is both a direct and indirect beneficial owner, he or she is (for the purposes of registration) referred to as an indirect beneficial owner.

The beneficial owner is direct if there is no intermediary between him and the registering person. His position is established directly, i.e. he is for example a shareholder of the registering person or a member of its body.

The obligation to enter data into the register applies to all legal entities and trusts established in the Czech Republic. They submit an application for entry of data in the register and subsequently provide supporting documents to be entered. Details regarding the beneficial owners must be complete and accurate. Subsequently, the legal entity is obliged to update this information regularly to ensure that it is true and corresponds to the actual situation.

Following the amendment to the Act on the registration of beneficial owners (Amendment No. 245/2022 Coll., which entered into force on 1 October 2022), a beneficial owner is a person who meets the following criteria: 

• Own interest, shares or voting rights greater than 25%.
• Entitled, directly or indirectly, to a more than 25 % share in the profits or other own resources the liquidation balance.
• Has the right to control (exercise decisive influence) over a company (corporation) that owns more than 25% of the given corporation.
• Has the right to exercise decisive influence in the corporation by other means.

Another novelty of the above-mentioned amendment is the fact that the registration of beneficial owners must now be compulsorily recorded by district and regional chambers, political parties or associations of unit owners.

The registration of beneficial owners is mainly intended for their verification. One of the main reasons is to prevent money laundering, legalization of proceeds from criminal activity or terrorist financing. The beneficial owner is considered to have significant influence over the legal entity and is often the recipient of economic benefits from its activities.

Entry, change or deletion of data can be made either through the court (in court proceedings) or through a notary. In principle, the notary and the court are equivalent authorities in terms of recording data in the register of beneficial owners. Notarial records are not subject to direct control or review by the court.

Obliged entity and AML obligations

The Beneficial Owners Registration Act affects essentially all legal entities. It is of particular importance in the processes of client identification and control carried out by so-called AML obliged persons (typically banks, but increasingly also other persons, e.g. real estate developers, auditors or tax advisors). AML obliged persons are persons defined in Act No.253/2008 Coll., on Certain Measures against the Legalization of Proceeds of Crime and Terrorist Financing, who are obliged to identify the client when concluding a transaction with this client according to specified conditions. The abbreviation AML is taken from the English term Anti Money Laundering.

It is the duty of the obliged person to check the records of the legal entity. Should it fail to do so, a fine up to CZK 10,000,000 will be imposed on it. If it violates this obligation in a serious manner, repeatedly or regularly, it is liable to a fine of up to CZK 130,000,000 or even a ban on its activities.

When inconsistencies are detected, the obliged entity shall first contact the client with its findings and give him the opportunity to comment on the irregularity. If the client does not rectify or even explain these inconsistencies, the obliged person must notify the court of this fact. In a situation where it did not disclose the inconsistencies to the client, it could be fined up to CZK 100,000. In case of failure to report the findings to the court, the fine is up to CZK 1,000,000.

Sanctions or what can happen if the law is not followed....

Violations of the obligations arising from the Beneficial Owners Registration Act expose a legal entity to possible sanctions. The first is the unenforceability of obligations under shielding contracts. It is the unenforceability of obligations arising from a legal act concealing the true owner, where that owner was not registered in the records. It may be an obligation between the beneficial owner and a third party, which is to act in his capacity and exercise the rights attached to the ownership of the share. The aim of this provision is to avoid the services of accidental or professional fictitious beneficial owners (strawmen).

Another sanction may be a prohibition on the payment of profit sharing in the corporation to the beneficial owner. In this case, the time of the decision of the statutory body on the payment of profit sharing is decisive. If this person is not entered in the register of beneficial owners, the statutory body is obliged to suspend this payment and wait until the end of the accounting year to see if the beneficial owner is entered in the register. This fact is verified, among other things, by auditors when auditing the financial statements, as this fact may have an impact on the financial statements (the correctness of the presentation of the decision of the general meeting on the payment of profit sharing or other source of equity and the subsequent approval / disapproval of the payment itself by the statutory body).

One of the other possible sanctions is a ban on exercising voting rights at the general meeting of the business corporation. Therefore, a beneficial owner not registered in the register cannot exercise voting rights or make decisions as its sole shareholder in the decision-making of the supreme body. If this prohibition is violated, the resolution of the supreme body or the decision of the sole shareholder shall be deemed invalid.

Furthermore, a legal entity is also liable for offences. These include, for example, breaches of the registering person’s obligation to ensure the entry of data in the register of beneficial owners within 15 days of the decision on the inconsistency. It may also be a failure to provide the necessary assistance to the registering entity. A fine of up to CZK 500,000 may be imposed under the misdemeanour procedure.

In conclusion...

Registration of beneficial owners represents the obligation of a legal entity to take individual steps to disclose and continuously update the required information under the related law. Registration of beneficial owners is, among other things, reflected in the work of persons subject to the identification obligation under the AML Act.

In the event of a breach of the registration obligation, the risks are not only for the legal entity itself (the registering entity), but also for its owners or members of the statutory body. It is therefore important that the requirements set out in this law are met in a proper and timely manner.    

Author: Martina Janýrová, Roman Kůrka