Potential public sector partners’ awareness of the facts and their legal rights and obligations that must be taken into account when determining the ownership structure of a public sector partner, and in particular clarification of what is meant by the very concept of a public sector partner’s ownership structure (content and scope), have proven to be important parts of the entire registration process based on our several years of experience in the field of public sector partner registration. In addition to the information provided above, the article also emphasizes that the authorized person’s exercise of professional diligence in identifying the ownership structure of a public sector partner is not an end in itself.
Pursuant to Act No. 315/2016 on the Register of Public Sector Partners and on Amendments to Certain Acts (hereinafter also referred to as the “Act on the RPVS”) and pursuant to Act No. 297/2008 Coll. on the Prevention of Money Laundering and the Financing of Terrorism and on Amendments to Certain Acts (hereinafter also referred to as the “AML Act”) an authorized person is required, in the process of identifying the beneficial owner of a public sector partner, to (among other things) identify the ownership structure of the public sector partner and include it in the public sector partner’s verification document.
The disclosure of the public sector partner’s ownership structure by an authorized person, with the public sector partner’s lawful cooperation, may appear to be a simple task; but from the perspective of the public sector partner itself, it is, on the contrary, a time-consuming and administratively demanding process within the overall process of identifying the ultimate beneficiary.
The ownership structure of a public sector partner, or its disclosure, can be simply defined as the identification of any and all legal or natural persons, or other entity that holds any qualifying interest in the public sector partner, including through a chain of legal entities, down to the level of natural persons.
Pursuant to Section 5(3) of the Public Sector Partner Register Act, if an application for registration (including initial registration, or an entry of changes concerning data recorded about a public sector partner and its ultimate beneficial owners in the Public Sector Partners Register) concerns the ultimate beneficial owner, a verification document must be attached to the application for registration. Similarly, pursuant to Section 5(6) of the RPVS Act, the authorized person is required to provide true and complete information in the application for registration, and if the application for registration concerns the ultimate beneficial owner, to also support such information with a verification document.
Pursuant to Section 11(6)(b) of the RPVS Act, the identification of the beneficial owner and the verification of the beneficial owner’s identification are demonstrated by a verification document in which the authorized person specifies the ownership structure and management structure of the public sector partner (if it is a legal entity). The inclusion of the ownership structure in the verification document is thus one of the essential requirements of the verification document.
Pursuant to Section 6(1)(e) of the RPVS Act, the registering authority shall verify, prior to registration, whether the verification document meets the requirements under Section 11(6) of the RPVS Act.
Subsequently, pursuant to Section 8(1) of the RPVS Act, if the application for registration does not meet the conditions under Sections 5 and 6 of the RPVS Act, the registering authority shall not proceed with the registration. The registering authority shall notify the authorized person of this fact by means of a notice of refusal to make the entry.
It is thus clear from the above-cited provisions of the RPVS Act that, following the submission of an application for the entry of data into the Public Sector Partner Register by an authorized person (whether for an initial entry or for the entry of changes regarding data recorded about a public sector partner and its ultimate beneficiaries in the Public Sector Partner Register) verifies whether the verification document meets the requirements under Section 11(6) of the Public Sector Partner Register Act and thus whether it specifies the ownership and management structure of the public sector partner. If the ownership structure is not specified in the verification document, and likewise if the ownership structure is not specified or is not sufficiently disclosed, the registering authority will not process the application for registration or will reject such an application.
We remind you that the disclosure of the ownership structure of a public sector partner is a process within the identification of the beneficial owner, the result of which is to identify the natural persons who are the beneficial owners of the public sector partner. Which natural person is considered the beneficial owner is defined in Section 6a of the AML Act. Since the purpose of this article is not to provide a detailed explanation of the defining characteristics of beneficial owners and thus the circumstances under which a natural person is considered a beneficial owner under the AML Act, a brief premise (which does not include all the facts that establish the status of beneficial owner for the natural persons concerned) that the beneficial owner of a legal entity is (among other things) the natural person who holds a share in the registered capital, voting rights, and economic benefit (profit) of the legal entity equal to or greater than 25%.
In practice, it often occurred that authorized persons and public sector partners focused on uncovering the ownership structure and, within its entities —legal entities—down to the level of natural persons who held this share or had an influence on this share (e.g., through an indirect share). For entities (legal entities) holding a stake below the 25% threshold of the share capital, voting rights and economic benefits of the public sector partner, or in the case of minority shareholders (e.g., holding up to 5%), there were tendencies that it was not necessary to further disclose their ownership structure in the verification document, as the disclosure of their ownership structure was not intended to influence the identification of the ultimate beneficial owner, which in such a case is not even possible. In practice, it also often happened, particularly with foreign public sector partners, that the provision of statutory cooperation by the public sector partner in disclosing the ownership structure was associated with a higher administrative burden, rejected on the grounds that no natural person within the minority owner (legal entity) meets the requirements for identification as the ultimate beneficial owner, without any evidence of this fact.
However, we do not consider this procedure to be correct, and in our legal opinion, the authorized person would not have acted with due diligence within the meaning of the RPVS Act. The consequence would also be that the application for entry in the Public Sector Partner Register would be rejected by the registering authority, precisely because the authorized person would not have disclosed the ownership structure of all entities (including minority ones) or would not have disclosed it sufficiently. It is precisely within the ownership structure of minority legal entities that a natural person may exist whose direct share in the public sector partner does not reach the required 25% threshold, but together with an indirect stake in the minority entity, the sum of the direct and indirect stakes will reach this threshold, and that individual will thus be identified as the ultimate beneficial owner of the public sector partner.
We will illustrate this using a specific public sector partner:
The public sector partner is the limited liability company XY. Its partners are the following natural and legal persons:
Natural person A 21% direct stake in XY
Natural person B 24% direct stake in XY
Legal Entity C 50% direct stake in XY
Legal Entity D 5% direct stake in XY
Legal Entity C has the following ownership structure:
Individual E 50% direct stake in C and thus a 25% indirect stake in XY
Individual F 50% direct stake in C and thus 25% indirect stake in XY
Legal entity D has the following ownership structure:
Individual A 50% direct stake in D and thus a 2.5% indirect stake in XY based on the stake in D
Individual B 50% direct stake in D and therefore a 2.5% indirect stake in XY based on the stake in D
The beneficial owners of XY will thus be identified as follows:
Individual B 26.5% direct and indirect stake in XY (24% direct + 2.5% indirect stake
Individual E 25% indirect stake in XY
Natural person F 25% indirect interest in XY
If the ownership structure of legal entity D were not disclosed, it would not be possible to identify natural person B as the beneficial owner of the partner and the public sector, as it would not have been determined that they meet the 25% threshold for a share in the partner’s equity, voting rights, and economic benefit (profit) through the sum of their direct and indirect shares. In the case of legal entity C, we are not dealing with a direct minority share; therefore, disclosure of the ownership structure of legal entity C is necessary (the indirect share of natural persons E and F reaches the required 25% threshold).
In the event that a public sector partner fails to cooperate in disclosing the ownership structure of even minority entities —legal entities—for eligible persons as part of the identification of the ultimate beneficial owner, there are significant risks not only for eligible persons but also for public sector partners, consisting in the fact that:
- the registering authority will not process or will reject the application for entry of data into the public sector partners register;
- if an authorized person were to identify the ultimate beneficial owner without identifying and verifying minority entities in its ownership structure, its conduct could be deemed inconsistent with the standard of professional care required under the Public Sector Partners Register Act;
- the identification of the beneficial owner as defined by the AML Act would not have been properly carried out in accordance with the law;
- sanctions could be imposed under the RPVS Act.
