Irregularity proceedings under the Beneficial Owners Registration Act

On the 1st of June 2021, the discussed Act No. 37/2021 Coll., on the registration of beneficial owners (hereinafter referred to as the "Registration Act") and the related parts of the amendment to Act No. 253/2018 Coll., on Certain Measures against the Legalization of Proceeds of Crime and Terrorist Financing, as amended (hereinafter referred to as the "AML Act") will come into force.

The Registration Act newly regulates the issue of beneficial owners and the functioning of their registration. Compared to the current legislation, it introduces some new institutes and procedures, such as the irregularity procedure and sanctions for breach of the obligations imposed therein.

Irregularities

According to the Registration Act, an irregularity is a situation in which valid data or data that have been deleted from the register of beneficial owners without replacement or with replacement by new data do not or did not correspond to the actual situation, or a situation in which no data are entered in the register of beneficial owners. In other words, a discrepancy in the data recorded means an error in the data, both current and previously recorded, or the absence of mandatory data.

The proceedings concerning the discrepancy shall be conducted by the court competent to register the beneficial owners. In the case of legal persons, the competent court will be the regional court in whose district the legal person has its registered office. The court shall initiate proceedings without a petition, either on the basis of a notification or on the basis of its own findings.

The court is obliged to inform the public authorities and obliged persons under the AML Law who discover the irregularity in the course of their activities.

Procedure in case of detection of an irregularity by the obliged person

If the obliged person comes to the conclusion, when carrying out an inspection of a client, that the data on the client's actual owner (current or former), which he/she has reached in the course of this activity, differs from the data stated in the records, he/she is obliged to resolve this discrepancy. In the first instance, the obliged person must draw the client's attention to the discrepancy and give him the opportunity to comment on the findings. If the client does not refute or rectify the discrepancy without undue delay (considering the time required for any entry in the register of beneficial owners), the obliged person shall report the discrepancy to the competent court. The notification of the irregularity to the court shall be supported by the facts or documents proving the irregularity and, where appropriate, by a statement from the client.

Failure to comply with the above obligations shall constitute an offence for which the obliged person shall be liable to a fine of up to CZK 1 000 000.

Court procedure

Where an irregularity is found, the court shall first call upon the person registering the irregularity to refute or rectify the irregularity within a time limit which it shall specify for that purpose. If the registrant fails to comply with the invitation, the court shall, by order, initiate proceedings in respect of the irregularity.

Where the irregularity consists in the fact that no entry has been secured by the person registering the beneficial owner in the register of beneficial owners, the court shall, after a futile appeal, inform the administrative authority competent to deal with offences thereof.

However, the court shall not automatically initiate proceedings in respect of an irregularity, but only in those cases where it is appropriate to do so in order to protect the rights of third parties. The court shall decide whether to initiate irregularity proceedings at its discretion, taking into account the nature and circumstances of the registrant concerned.

In general, therefore, proceedings shall not be initiated in respect of every irregularity, but only in those cases where the irregularity is likely to cause damage or other negative consequences. The party to the irregularity proceedings is the registrant and, where applicable, the party who is deemed by the court to have failed to provide the registrant with the necessary cooperation in violation of the registration law (typically the beneficial owner).

At the same time as issuing the order initiating the irregularity proceedings, the court will enter a note of the irregularity in the register of beneficial owners, stating what the irregularity is perceived to be. This note is for information only and has no further consequences.

The result of the irregularity procedure may be either a refutation or a confirmation of the irregularity (or a decision refuting part of the irregularity and confirming part of it). Where an irregularity is disproven, the court shall enter a note in the register to the effect that the irregularity has been disproven and shall at the same time delete the note.

The outcome of the proceedings will thus be apparent only from the statement of historical data. The erased note will not be apparent from the extract of the current data.

If the irregularity is confirmed, the court shall, after the decision on the irregularity has become final, enter in the note on the irregularity how it was decided in the proceedings, the date on which the irregularity arose and the duration of the irregularity, delete the incorrect data in force and enter the data corresponding to the actual situation, if it has come to light in the proceedings.

At the same time, the court shall send a copy of the decision on the irregularity to the administrative authority responsible for dealing with offences. Where appropriate, the court shall also decide that the reason for the irregularity is the failure of the beneficial owner to provide the necessary cooperation to the registering person. In such a case, it is not the person registering the irregularity who is liable for the offence consisting in the irregularity, but the person who failed to provide the necessary cooperation.

Consequences of an irregularity decision

The decision on the irregularity also entails an offence liability. The registrant commits an offence if:

1. fails to ensure timely registration in the register of beneficial owners, or
2. fails to ensure the registration within 15 days of the legal validity of the decision on the irregularity, that new data are entered in the register of beneficial owners if the court has deleted the incorrect data without compensation.

As stated above, a person who fails to provide the necessary cooperation to the person registering the offence may also commit an offence.

A fine of up to CZK 500 000 may be imposed for the above-mentioned offences.

Prohibition on payment of profits and exercise of voting rights

Another negative consequence of the irregularity consists in the fact that the required data are not entered in the register of beneficial owners, either because the legal entity has not ensured the entry or because the court has deleted the data due to the irregularity, is the prohibition of the payment of the beneficial interest and the prohibition of the exercise of voting rights.

In fact, the Registration Act prohibits a corporation from paying a share of its profits or other resources to a corporation or trust that has no beneficial owner on its register of beneficial owners. Further, a business corporation is prohibited from paying a share of profits to a natural person - the beneficial owner - if he or she is not registered as the beneficial owner of the business corporation in the register of beneficial owners. The prohibition on the payment of distributions also applies to corporations or trusts of which the natural person is also the beneficial owner.

And the ban extends to the actual voting in the highest body. If the beneficial owner of a business corporation is not registered in the register of beneficial owners, neither he, nor a legal person or one who acts on behalf of a trust of which he is also the beneficial owner, may exercise voting rights or make decisions as its sole shareholder in the decision-making of the supreme body of that business corporation.

Voting rights in a business corporation may not be exercised by, or as the sole shareholder of, a legal entity which has no beneficial owner registered in the register of beneficial owners when making decisions of the supreme body.

In practice, this means that not only may a beneficial owner who is not registered in the register of beneficial owners, or a legal entity that does not have a registered beneficial owner, not be paid profits, but that person may not vote on the distribution of profits (or any other matter) in the supreme body.

Public contracts

Irregularity can have very negative consequences for bidders for public contracts.

As of 1 June 2021, according to Act No. 134/2016 Coll., on public procurement, the contracting authority must find out information about the real owner of the selected supplier by obtaining a full extract from the register of real owners. If the relevant data of the supplier are not entered in the register of beneficial owners and the contracting authority cannot ascertain them, it will exclude the supplier.

At the same time, the contracting authority may terminate or withdraw from an existing public contract without undue delay if it discovers that false information about the supplier has been entered in the register of beneficial owners during the tendering procedure. For reasons of caution and to avoid possible litigation, termination or withdrawal should then only take place following a decision on the irregularity, by which the court confirms the falsity of the data entered.

Conclusion

Author: Aneta Koubková