12 September 2019
Two and half years ago, on February 1, 2017, the so-called Anti-Letterbox Companies Act (Act) entered into force. It was a reaction to the years of recurring suspicions in the public sector regarding massive conflicts of interest, corruption, and the favoritism of creditors. These problems and public pressure created the political will to mandate a web-based, free of charge disclosure of ownership backgrounds of private entities dealing with public finances. The Act was co-drafted by Taylor Wessing.
The Act is based on the principle that only those private entities which voluntarily and reliably reveal their beneficial owners can “do business” with the state. In other words, private sector entities may receive cash and non-cash benefits from the public sector only if they disclose and register their beneficial owners in a special register established for that purpose. This special register is operated in parallel to the Companies Register that contains the beneficial owners of all companies, as required by the 5 AML Directive, on a non-public basis. In order to avoid any unnecessary administrative burden to the companies, the registration of beneficial owners in the special registry substitutes their obligatory registration in the Companies Registry.
After two and half years of effectivity of the Act, its benefits are already measurable. Out of the more than 20,000 private entities registered, there are only around 30 natural persons – Cypriot citizens - registered as beneficial owners. That gives us the notion that data accuracy is on the right track and hundreds of Cypriot letterbox companies, which are directly or indirectly owned by Slovak entities really disclosed their ownership and managing structures and registered their real beneficial owners.
Thanks to the Act and professional approach of the judges at District Court Zilina, which keeps this special registry, several court proceedings with regional oligarchs started and forced these persons to admit their status of beneficial owners in companies receiving negligible amounts from public sector. The recent investigation of the European Commission on a possible conflict of interest of the Czech Prime Minister, Mr Babis, was based on the data from this special registry. The application of the Act also led to first fines recently imposed by the District Court Zilina, making the Act a truly effective tool for controlling the persons who benefit from public funds.
On the other hand, despite the undisputed benefits of the Act, some applicational and interpretative uncertainties have emerged. After all, it is a unique law, passed at a time, when there was no comparable template in any other country, which could have served as an inspiration.
An amendment to the Act came into force on 1 September 2019 (Amendment). It provides a specification of certain terms and a modification of several provisions of the (original) Act in order to narrow down the possibilities of circumventing the law and at the same time to eliminate its applicational deficiencies.
Every person that is not an entity of public administration, that has a statutorily-defined business relation with the public sector, or that wishes to enter into such a relation, is obliged to register. Such person is called a Partner of the Public Sector (PPS). Statutorily-defined relations with the state include, amongst others: receiving financial means from the public budget, receiving property rights from the public sector, being a supplier in a public procurement or fulfillment of other statutory criteria (for instance, as a mining permit owner). There are de minimis thresholds: A person receiving financial means not exceeding EUR 100,000 in one instalment or EUR 250,000 per year or a person whose acquired property or rights do not have a value exceeding EUR 100,000, is not considered a PPS. In order to be able to assess the “value of the contract”, i.e. to deciding, whether or not the company has the obligations under the Act, the Amendment provided a potential PPS with detailed instructions on how to calculate the value (e.g. value of a contract – excl. VAT; it does not add up from different contracts among the same parties). The Amendment also provides a specific definition of public undertaking. An entity falling under this definition is considered a public sector entity and its business partners have to follow the obligations under the Act with an important exemption: private entities acquiring goods and services from a public undertaking in their regular course of business are exempted. A new exemption also applies to banks and other financial institutions.
A natural person who benefits from the activities of a PPS is a so-called beneficial owner (BO). The BO either exercises control over a legal entity (solely or jointly with another person), or receives an economic benefit from the business of that legal entity. A special regime applies to issuers of shares that are regularly traded on the stock market and their subsidies. In such a case and provided there are no natural persons falling under the definition of the BO, the members of the statutory body are registered instead of BOs. The Amendment narrowed down the previously broad scope of top managers that were required to be registered in such a case and enabled that any BO can register the company address instead of the residence under certain circumstances.
An “authorized person” (AP) entitled to conduct a registration of a PPS into the register can be an attorney-at-law, a public notary, banks or branches of a foreign bank, an auditor, or a tax advisor. The AP must have a registered seat or place of business in the Slovak Republic and independently collects and assesses all available information about the BO in a verification document. In this document, the AP determines the basis upon which the BO has
been identified or verified and identifies the PPS shareholders and management structure.
BOs of the PPS have to be verified on December 31 of each calendar year and also if an AP registers a PPS in the register, if there are register changes regarding the BO and/or AP, if a contract or its amendment is concluded, or if a consideration exceeding EUR 1 million under a contract has been received. Pursuant to the Amendment a voluntary verification is possible at any time. The advantage of such a voluntary verification is that unless there is a change in the BO, no additional verification is needed as long as a verification was conducted in the course of the past six months.
Where incorrect or incomplete information about the BO is provided in the register, a fine will be imposed by court in an amount corresponding to the economic benefit gained by the PPS. In case it is not possible to determine such a benefit, a flat rate ranging from EUR 10,000 to 1 million will be set.
In addition, the executive bodies of a PPS can be fined from EUR 10,000 to 100,000 and will subsequently be banned from holding an executive body office in any private company on the basis of a registration into a “disqualification registry.” For two years following the removal of the PPS from the Register of Partners of the Public Sector by court’s decision, the company cannot be registered again and is therefore unable to trade with the state or receive public funds. The AP acts as a guarantor for the payment of the fine imposed on the PPS executive body, unless the AP is able to prove it acted with professional diligence during registration/verification.
Anybody can file a qualified motion to the registration court to examine the registration of the BO. Qualified means that facts justifying the doubts about the accuracy and validity of registration must be presented. In case the court opens the examination proceedings, the “tables turn” and it is up to the PPS to carry the burden of proof and provide sufficient evidence concerning the accuracy of the registered information.
By adopting the Act, the Slovak Republic has started to apply the highest standards on fighting money laundering in its own state apparatus. Making public who deals with the state has a positive impact on competition and higher administrative costs related to the Act are balanced out by the removal of market disturbances caused by a lack of transparency. The purpose of the Amendment was to make the Act an even stronger tool for fighting the undesirable connections between business and politics.